GUARANTEED ACCUMULATION ACCOUNT
a Guaranteed Interest Option
available under Variable Annuity Contracts
issued by
Aetna Life Insurance and Annuity Company
This Prospectus describes the Guaranteed Accumulation Account ("GAA"), a
credited interest funding option available under certain variable annuity
contracts issued by Aetna Life Insurance and Annuity Company (the "Company").
The Company guarantees stipulated rates of interest for stated periods of
time on amounts applied to GAA. During a specified period of time, amounts
may be allocated to available "guaranteed terms" within either a short-term
or long-term classification. Interest is credited daily at a rate that will
provide a guaranteed annual effective yield over the period of one year.
Guaranteed interest rates will never be less than the minimum rate specified
in the Contract. THE COMPANY CANNOT PREDICT OR GUARANTEE FUTURE LEVELS OF
GUARANTEED INTEREST RATES NOR GUARANTEE WHAT SUCH RATES WILL BE UNTIL THEY
ARE DECLARED FOR EACH GUARANTEED TERM.
All of the general assets of the Company, including amounts deposited to
GAA, are available to meet the guarantees under GAA. These assets are
chargeable with liabilities arising out of other business of the Company. The
Company will invest the amounts received in relation to GAA primarily in
investment-grade fixed income securities. Contract Holders do not have any
claim against specific assets of the Company relating to GAA.
WITHDRAWALS OR TRANSFERS FROM A GUARANTEED TERM PRIOR TO THE END OF THAT
GUARANTEED TERM MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. WITHDRAWALS FROM
THE CONTRACT MAY ALSO BE SUBJECT TO A DEFERRED SALES CHARGE AND/OR A
MAINTENANCE FEE AT THE TIME OF WITHDRAWAL. It is possible that you may
receive an amount less than the amount paid into the Contract for surrenders
of amounts held under the Contract. (See "Market Value Adjustment" and
"Contract Charges," as well as the Contract Prospectus.)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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This Prospectus is dated May 1, 1996
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act"), and, in accordance therewith, files
periodic reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information concerning the
Company may be inspected and copied at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material also
can be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
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TABLE OF CONTENTS
Page
AVAILABLE INFORMATION 2
GLOSSARY 4
SUMMARY 5
Description of the Guaranteed Accumulation Account 5
Guaranteed Rates and Guaranteed Terms 5
Transfers and Withdrawals 5
Market Value Adjustment 5
Maturity of a Guaranteed Term 6
Maturity Value Transfer Provision 6
Contract Charges 6
Investments 6
Guaranteed Account Notifications 6
DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT 7
General 7
Contributions to GAA 7
Deposit Period 7
Guaranteed Term 8
Guaranteed Term Classifications 8
Guaranteed Interest Rates 8
Maturity of a Guaranteed Term 9
Maturity Value Transfer Provision 9
TRANSFERS 9
Transfers from GAA 10
Transfers Between Guaranteed Term Classifications 10
SURRENDERS 10
MARKET VALUE ADJUSTMENT 11
Deposit Period Yield 11
Current Yield 11
MVA Formula 12
CONTRACT CHARGES 12
MISCELLANEOUS 12
Annuity Period 12
Deferral of Payments 12
Reinstatement 13
Contract Loans (403(B) Plans Only) 13
INVESTMENTS 13
DISTRIBUTION OF CONTRACTS 14
TAX CONSIDERATIONS 14
Taxation of the Company 14
Taxation of Annuities 14
THE COMPANY 14
History and Business 14
Financial Services Segment 15
Life Insurance Segment 16
General Account Investments 18
Other Matters 18
Properties 19
DIRECTORS AND EXECUTIVE OFFICERS 20
EXECUTIVE COMPENSATION 22
SECURITY OWNERSHIP OF MANAGEMENT 24
INDEMNIFICATION 24
EXPERTS 24
LEGAL PROCEEDINGS 24
LEGAL MATTERS 24
APPENDIX I--Examples of Market Value Adjustment Calculations 25
APPENDIX II--Examples of Market Value Adjustment Yields 27
SELECTED FINANCIAL DATA 28
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS 28
FINANCIAL STATEMENTS OF THE COMPANY F-1
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GLOSSARY
The following terms are defined as they are used in this Prospectus:
Accumulation Period: The period during which Purchase Payment(s) are
accumulated to provide future annuity benefits.
Aggregate Market Value Adjustment Amount: The sum of all Market Value
Adjustments calculated due to a surrender or transfer from Guaranteed Terms
prior to the end of those Guaranteed Terms. This total may be a positive or
negative figure.
Annuity: A series of payments for life or a definite period.
Annuity Period: The period during which Annuity payments are made.
Contract Holder: The entity to which the Contract is issued. The Contract
Holder is usually the employer, sponsor or trustee.
Deposit Period: The period of time during which one or more Purchase
Payments or transfers of accumulated values may be made to available
Guaranteed Terms to receive stipulated interest rates for stated periods of
time. A Deposit Period may be a month, a calendar quarter, or any other
period of time specified by the Company.
Guaranteed Interest Rates: The interest rate(s) guaranteed to be
credited, for a stated period of time, on amounts applied to a GAA Guaranteed
Term during a specific Deposit Period. Interest rates are annual effective
yields reflecting a full year's interest. Interest is credited daily.
Guaranteed Term: The period of time specified by the Company during which
one or a series of Guaranteed Interest Rates are credited.
Guaranteed Term Classifications: The grouping of Guaranteed Terms
according to their time to maturity:
Short-Term--All Guaranteed Terms of 3 years or less; or
Long-Term--All Guaranteed Terms of between 3 and 10 years.
Home Office: The Company's principal executive office located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Market Value Adjustment (MVA): An adjustment, if applicable, to the
amount withdrawn or transferred from a Guaranteed Term prior to the end of
that Guaranteed Term. The adjustment reflects the change in the value of the
investment due to changes in interest rates since the date of deposit and is
computed using the formula given in the Contract. The adjustment is expressed
as a percentage of each dollar being withdrawn.
Market Value Adjustment Amount (MVA Amount): The amount by which the
funds being withdrawn or transferred from a Guaranteed Term is increased or
decreased due to the MVA.
Maturity Value Transfer Provision: A provision that is available at
maturity when the Company automatically reinvests the total maturing
Guaranteed Term value into the open Deposit Period. This provision allows
Contract Holders or Participants to transfer or surrender the automatically
reinvested value, without an MVA, to an open Deposit Period within either
Guaranteed Term Classification or to other available investment options until
the last business day of the month following the maturity of a Guaranteed
Term. This provision only applies to the first request received from the
Contract Holder, or if applicable, Participant with respect to a particular
matured Guaranteed Term. The last business day of the month is defined as the
last business day of the month when the New York Stock Exchange is open.
Participant ("You"): An eligible person participating under a Variable
Annuity Contract.
Purchase Payment(s): The gross payment(s) made to the Company under a
Contract.
Variable Annuity Contract: An Annuity Contract providing for the
accumulation of values, and for retirement payments which vary in dollar
amount with investment results.
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SUMMARY
Description of the Guaranteed Accumulation Account
The Guaranteed Accumulation Account ("GAA") is a guaranteed interest option
available as a funding option under certain Variable Annuity Contracts issued
by the Company. Amounts invested in GAA are credited with interest rates
guaranteed by the Company for stated periods of time. Amounts must remain in
GAA for the full Guaranteed Term to receive the quoted interest rates.
Withdrawals or transfers from a Guaranteed Term before the end of the
Guaranteed Term may be subject to a Market Value Adjustment.
During a Deposit Period, Contract Holders or, if applicable, Participants
may direct some or all of their Purchase Payment(s) to GAA. Although the
Company may impose a minimum Purchase Payment on a Contract, there is no
minimum amount of payment if the investment comes from a Purchase Payment.
Transfers of accumulated amounts from other funding options to GAA are also
allowed. If a transfer is made to GAA from other Contract funding options,
the transferred value may not be less than $500 (see "Contributions to the
Guaranteed Accumulation Account").
More specifically, Contract Holders or, if applicable, Participants may
allocate Purchase Payments or transfer accumulated values during a Deposit
Period to available Guaranteed Terms within the Short-Term and Long-Term
Classifications. (See "Guaranteed Term Classifications.")
Guaranteed Rates and Guaranteed Terms
Interest is credited daily at a rate that will provide the guaranteed annual
effective yield over the period of one year. The Company will declare the
Guaranteed Interest Rate(s) for all available Guaranteed Terms prior to the
Deposit Period for those Guaranteed Terms. These Guaranteed Interest Rate(s)
are guaranteed for that Deposit Period and for the length of the Guaranteed
Term. Guaranteed Interest Rates will never be less than the annual effective
rate stated in the Contract. (See "Guaranteed Interest Rates").
Transfers and Withdrawals
Full or partial surrenders and transfers to other funding options under the
Contract are permitted from GAA. In addition, transfers from Guaranteed Terms
within one Guaranteed Term Classification may be made to the current Deposit
Period of other Guaranteed Terms within a different Guaranteed Term
Classification. However, amounts applied to a Guaranteed Term during a
Deposit Period may not be transferred during that Deposit Period or for 90
days after the close of that Deposit Period, except for transactions
processed under the Maturity Value Transfer Provision. This restriction may
not apply in all circumstances.
Contract Holders or, if applicable, Participants may choose the Guaranteed
Term Classification(s) from which amounts will be first withdrawn due to a
transfer or partial surrender. Amounts are withdrawn starting with the oldest
Guaranteed Term which has not reach maturity from each Guaranteed Term
Classification chosen. (See "Surrenders" and "Transfers and Withdrawals.")
Market Value Adjustment
Amounts withdrawn or transferred from a Guaranteed Term prior to the Maturity
Date may be subject to a Market Value Adjustment. The Market Value Adjustment
reflects the change in the value of the investment due to changes in interest
rates since the date of deposit, and may be positive or negative depending on
interest rate activity at the time of such withdrawal.
If amounts are withdrawn from GAA due to annuitization under one of the
lifetime Annuity options described in the Contract Prospectus, only the
positive Aggregate Market Value Adjustment, if any, is applied. Only a
positive Aggregate Market Value Adjustment amount, if any, is applied to
amounts withdrawn from GAA due to the death of a Participant if withdrawn
within the first six months after the date of death. (See "Market Value
Adjustment" and "Annuity Period.")
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Maturity of a Guaranteed Term
On or before maturity of the Guaranteed Term, a Contract Holder or, if
applicable, Participant, may instruct the Company to, on maturity, (a)
transfer the matured value to one or more new Guaranteed Terms available
under the current Deposit Period, (b) transfer the matured value to one or
more of the variable funding options available under the Variable Annuity
Contract, or (c) surrender the matured value. In all three instances, no
Market Value Adjustment would be applicable to the transferred or surrendered
matured value. However, a deferred sales charge may be assessed on the amount
surrendered from the Contract. (See "Transfers" and "Surrenders.")
If the Company does not receive direction from the Contract Holder or
Participant, if applicable, at its Home Office by the maturity date of the
Guaranteed Term, the amount from the maturing Guaranteed Term will be
transferred to the available Deposit Period for the Guaranteed Term having
the shortest maturity within the same Guaranteed Term Classification. (See
"Maturity of a Guaranteed Term.")
Maturity Value Transfer Provision
The Maturity Value Transfer Provision is available at maturity when the
Company automatically reinvests the total maturing Guaranteed Term value into
the open Deposit Period. This provision allows Contract Holders or
Participants, if applicable, to transfer or surrender, without a Market Value
Adjustment, all or a portion of the matured value that was transferred to a
new Guaranteed Term by default (if applicable, a deferred sales charge may
still be assessed on the surrendered amount). (See "Maturity of a Guaranteed
Term.")
Contract Charges
Certain charges such as the mortality and expense risk charge and
administrative expense charge are assessed under the Contract to compensate
the Company for costs associated with administering the Contract. These
charges are not deducted from GAA. Other charges, such as deferred sales
charges, maintenance fees, premium taxes and transfer fees, as well as any
federal income taxes and tax penalties, may be deducted from amounts held in
or transferred from GAA. For a description of all fees and charges deducted
under the Contract, see "Contract Charges" and the Contract Prospectus.
Investments
The interest rate(s) credited during any Guaranteed Term does not necessarily
relate to investment performance. As in the case of all of the Company's
general account assets, deposits received under the GAA option, regardless of
which Guaranteed Term Classification is used, will generally be invested in
federal, state and municipal obligations, corporate bonds, preferred stocks,
real estate mortgages, real estate, certain other fixed income investments,
and cash or cash equivalents. All of the general assets of the Company are
available to meet the guarantees under the GAA. (See "Investments.")
Guaranteed Account Notifications
At least 18 calendar days prior to the maturity date, the Company will notify
you of a Guaranteed Term's maturity. The notice will also include information
relating to the current Deposit Period's Guaranteed Interest Rates and the
available Guaranteed Terms. At any time, you may obtain information
concerning available Deposit Periods, Guaranteed Interest Rates, and
Guaranteed Terms through the use of a toll-free telephone number within five
business days before the upcoming maturity date (1-800-GAA-FUND or
1-800-422-3863). (See "Description of the Guaranteed Accumulation
Account--General" and "Maturity of a Guaranteed Term.")
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DESCRIPTION OF THE
GUARANTEED ACCUMULATION ACCOUNT
General
This Prospectus describes the provisions of the Guaranteed Accumulation
Account ("GAA"), a guaranteed interest option available under Variable
Annuity Contracts ("Contracts") issued by Aetna Life Insurance and Annuity
Company ("Company"). Amounts allocated to GAA are held in a noninsulated,
nonunitized separate account. (See "Investments.")
GAA offers guaranteed interest rates ("Guaranteed Interest Rates") for
stated periods of time ("Guaranteed Terms"). All Purchase Payments or
transfers to GAA during a specific period of time ("Deposit Periods")
participate in a specific Guaranteed Term with corresponding Guaranteed
Interest Rates. Guaranteed Terms are classified according to their length of
time to maturity ("Guaranteed Term Classifications"). Each Deposit Period may
offer various Guaranteed Terms within one or both Guaranteed Term
Classifications. A Market Value Adjustment, which may be positive or
negative, may be applied to any values withdrawn or transferred from a
Guaranteed Term prior to the end of that Guaranteed Term, except for amounts
transferred under the Maturity Value Transfer Provision. However, if funds
are withdrawn from Guaranteed Terms due to the death of the Participant
within six months after the Participant's date of death, only a positive
Aggregate Market Value Adjustment Amount, if any, will be applied. After the
six-month period, the positive or negative Aggregate Market Value Adjustment
Amount will be applied. Only a positive Aggregate Market Value Adjustment
Amount, if any, is applied to any values withdrawn from Guaranteed Terms due
to annuitization under one of the lifetime Annuity options. If funds are
transferred from one Guaranteed Term prior to the end of that Guaranteed Term
to a Guaranteed Term of the other Guaranteed Term Classification, a Market
Value Adjustment (positive or negative) is applied.
The Company maintains a toll-free telephone number for Contract Holders
or, if applicable, Participants wishing to obtain information concerning
available Deposit Periods, Guaranteed Interest Rates, and Guaranteed Terms.
The telephone number is 1-800-GAA-FUND (1-800-422-3863). In addition, the
Company will send notification of the upcoming Deposit Period dates and
information on the current Guaranteed Interest Rates, Guaranteed Terms and
projected matured Guaranteed Term values to Contract Holders, or, if
applicable, Participants who have funds in a maturing Guaranteed Term. This
notification will be sent at least 18 calendar days prior to the maturity of
a Guaranteed Term.
Contributions to GAA
Amounts may be applied to Guaranteed Terms available in a current Deposit
Period by allocating one or more Purchase Payment(s) to GAA or by
transferring accumulated value(s) from other funding options available under
the Contract or from other Guaranteed Terms. Although the Company may impose
a minimum Purchase Payment on a Contract, there is no minimum Purchase
Payment required for a Guaranteed Term. Please refer to the applicable
Contract prospectus.
Amounts applied to a Guaranteed Term during a Deposit Period may not be
transferred during that Deposit Period or for 90 days after the close of that
Deposit Period, except under the Maturity Value Transfer Provision.
Deposit Period
The Deposit Period is a period of time during which one or more Purchase
Payments or transfers from other Contract funding options or other Guaranteed
Terms may be made to available Guaranteed Terms to receive stipulated
Guaranteed Interest Rates for stated periods of time. Each Deposit Period may
be a month, a calendar quarter, or any other period of time specified by the
Company.
Both Guaranteed Term Classifications will be available during each Deposit
Period. In addition, more than one Guaranteed Term within a Guaranteed Term
Classification may be available during each Deposit Period. For example, a
Deposit Period might offer a 1-year and a 3-year Guaranteed Term under the
Short-Term Classification and a 5-year and a 7-year Guaranteed Term under the
Long-Term Classification.
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Guaranteed Term
A Guaranteed Term is the period of time specified by the Company during which
one or a series of Guaranteed Interest Rates are credited. Guaranteed Terms
are offered at the Company's discretion for various lengths of time ranging
from one to ten years.
Guaranteed Term Classifications
Guaranteed Term Classifications refer to the grouping of Guaranteed Terms
according to their time to maturity. The following are the Guaranteed Term
Classifications:
Short-Term--All Guaranteed Terms of 3 years or less; or
Long-Term--All Guaranteed Terms of between 3 and 10 years.
During each Deposit Period, the Company may offer more than one Guaranteed
Term within each Guaranteed Term Classification. Contract Holders or, if
applicable, Participants may elect to allocate Purchase Payments to
Guaranteed Terms within one or both of these Guaranteed Term Classifications
during a Deposit Period.
Guaranteed Interest Rates
Guaranteed Interest Rates are the interest rates that are guaranteed to be
credited on amounts applied during a Deposit Period for a specific Guaranteed
Term. Guaranteed Interest Rates are annual effective yields, reflecting a
full year's interest. The interest is credited daily at a rate that will
produce the guaranteed annual effective yield over the period of one year.
Guaranteed Interest Rates are credited according to the length of the
Guaranteed Term as follows:
(bullet) Guaranteed Terms of One Year or Less: A Guaranteed Interest
Rate is credited from the date of deposit to the last day of the
Guaranteed Term.
(bullet) Guaranteed Terms of Greater than One Year: Several different
Guaranteed Interest Rates may be applicable during a Guaranteed
Term of more than one year. The initial Guaranteed Interest Rate
is credited from the date of deposit to the end of a specified
period within the Guaranteed Term. The remainder of the
Guaranteed Term may also allow for several different Guaranteed
Interest Rates for subsequent specific periods of time. For
example, a 5-year Guaranteed Term may guarantee 5% for the first
year, 4.75% for the next two years, and 4.5% for the remaining
two years.
The Company will announce the available Guaranteed Terms and current
Guaranteed Interest Rates for each Deposit Period at least 18 calendar days
prior to the start of each Deposit Period. In no event will the Company
guarantee or credit a Guaranteed Interest Rate less than the minimum rate
specified in the Contract. In addition, GAA does not allow for the crediting
of interest above the Guaranteed Interest Rates which are announced by the
Company prior to the start of a Deposit Period.
The Company's determination of Guaranteed Interest Rates is influenced by,
but not necessarily correspond to, interest rates available on fixed income
investments which the Company may acquire using amounts deposited into GAA
(see "Investments"). In addition, the Company will consider other factors in
determining Guaranteed Interest Rates including regulatory and tax
requirements, sales commissions and administrative expenses borne by the
Company, general economic trends, and competitive factors.
THE COMPANY MAKES THE FINAL DETERMINATION REGARDING GUARANTEED INTEREST
RATES. THE COMPANY CANNOT PREDICT THE LEVEL OF FUTURE GUARANTEED INTEREST
RATES.
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Maturity of a Guaranteed Term
At least 18 calendar days prior to the maturity of a Guaranteed Term, the
Company will send notification to Contract Holders or, if applicable,
Participants of the upcoming Deposit Period, the projected value for the
amount maturing in the Guaranteed Term and the Guaranteed Interest Rate and
Guaranteed Term for the current Deposit Period. Contract Holders or, if
applicable, Participants may transfer amounts in any maturing Guaranteed Term
to new Guaranteed Terms. The amount in any maturing Guaranteed Term may also
be transferred into any other allowable option(s) available under the
Contract. There is no Market Value Adjustment applied to amounts transferred
or surrendered from a Guaranteed Term on the date that Guaranteed Term
matures; however, a deferred sales charge, if applicable, may be assessed.
If the Company does not receive direction from the Contract Holder or, if
applicable, the Participant at its Home Office (or any other designated
office) by the maturity date of a Guaranteed Term, the Company will
automatically transfer the matured value to a Guaranteed Term having the
shortest maturity within the same Guaranteed Term Classification that will be
available for the new Deposit Period. The new Guaranteed Term may have a
different length of time to maturity than the maturing Guaranteed Term. For
example, if a 3-year Guaranteed Term matures and no direction is received,
amounts in this maturing Guaranteed Term will be transferred to the 2-year
Guaranteed Term, which is the Guaranteed Term available within the Short-Term
Classification of the new Deposit Period. If, however, only one Term is
available within the Classification, then the matured Guaranteed Term value
will be reinvested in that Term.
Once the matured amount has been transferred, the Contract Holder or, if
applicable, Participant will receive a statement confirming the transfer,
along with information on the new Guaranteed Rate(s) and Guaranteed Term.
Maturity Value Transfer Provision
The Maturity Value Transfer Provision is available at maturity when the
Company automatically reinvests the total maturing Guaranteed Term value into
the open Deposit Period. This provision allows Contract Holders or
Participants to transfer or surrender, without a Market Value Adjustment, the
matured value that was transferred by the Company to a new Guaranteed Term
(if applicable, a deferred sales charge may be assessed on the amount
surrendered from the Contract). If all of the matured value is transferred or
surrendered under the Maturity Value Transfer Provision, any interest accrued
under the current Guaranteed Term will be credited through the date of
transfer or surrender. The right to make a transfer or surrender under the
Maturity Value Transfer Provision is available until the last business day of
the month following the maturity date of a Guaranteed Term. The last business
day of the month is defined as the last business day of the month that the
New York Stock Exchange is open. The Maturity Value Transfer Provision only
applies to the first request received from the Contract Holder, or, if
applicable, Participant, with respect to a particular matured Guaranteed Term
value.
TRANSFERS
As described in the Contract Prospectus, all or any portion of accumulated
values under the Contract may be transferred at least 12 times during a
calendar year, without a transfer charge. Under some Contracts, after 12 such
transfers, each additional transfer is subject to a transfer charge of not
more than $10, deducted from the Contract value. Under other Contracts,
unlimited transfers may be made without charge. Please refer to the
applicable Contract prospectus.
Amounts applied to a Guaranteed Term during a Deposit Period may not be
transferred to any other funding option or Guaranteed Term during that
Deposit Period or for 90 days after the close of that Deposit Period.
Funds transferred under the Maturity Value Transfer Provision or upon the
maturity of a Guaranteed Term are not counted as one of the 12 free transfers
of accumulated values allowed per calendar year by those Contracts allowing
12 free transfers. In addition, no Market Value Adjustment is applied to the
matured Guaranteed Term value transferred upon maturity of a Guaranteed Term
or for values withdrawn or transferred from a Guaranteed Term under the
Maturity Value Transfer Provision.
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When a request is made to transfer a specific dollar amount in circumstances
in which a Market Value Adjustment is applicable, the Market Value Adjustment
will be included in the determination of the amount withdrawn from a
Guaranteed Term(s) to fulfill the request. Therefore, the amount actually
withdrawn from the Guaranteed Term(s) may be more or less than the requested
dollar amount. (See "Appendix I" for an example.)
Transfers from GAA
Contract Holders or, if applicable, Participants can choose the Guaranteed
Term Classification from which Funds will be first withdrawn. The Company
withdraws funds starting from the oldest Guaranteed Term which has not
reached maturity within the Guaranteed Term Classification chosen. If no
direction is received, funds are withdrawn pro rata among the Guaranteed Term
Classifications, starting with the oldest Guaranteed Term which has not
reached maturity, and any other investment options. A positive or negative
Market Value Adjustment is applied to the amount requested for transfer. (See
"Market Value Adjustment.")
Transfers Between Guaranteed Term Classifications
Transfers are permitted from Guaranteed Terms within the Short-Term
Classification to available Long-Term Guaranteed Terms of a current Deposit
Period. Transfers are also permitted from Guaranteed Terms within the Long-
Term Classification to available Short-Term Guaranteed Terms of a current
Deposit Period. For example, funds may be transferred from a 3-year
Guaranteed Term (any time after 90 days from the close of the Deposit Period
applicable to that 3-year Guaranteed Term) to the open Deposit Period of a
7-year Guaranteed Term. Funds will be first transferred from the oldest
Deposit Period for which the Guaranteed Term has not reached maturity. A
Market Value Adjustment is assessed on the transferred amount. The transfer
is counted as one of the 12 free transfers allowed each year by those
Contracts allowing 12 free transfers.
A transfer of value from one Guaranteed Term prior to maturity of that
Guaranteed Term to another Guaranteed Term within the same Guaranteed Term
Classification is not permitted under any of the Contracts.
SURRENDERS
The Contract allows for full or partial surrenders at any time during the
Accumulation Period. To make a full or partial surrender, a surrender request
form must be properly completed and submitted to the Company's Home Office
(or any other designated office). Partial surrenders are made pro rata among
the Contract funding options unless requested otherwise by the Contract
Holder or, if applicable, the Participant. For surrender purposes, each
Guaranteed Term Classification is considered a separate funding option.
The portion of the partial surrender made from GAA is withdrawn from the
Guaranteed Term Classification elected by the Contract Holder or, if
applicable, the Participant. Within the elected Guaranteed Term
Classification, funds will be removed starting with the oldest Guaranteed
Term which has not reached maturity. If no Guaranteed Term Classification is
elected, the Company will withdraw funds from Guaranteed Terms in each
Guaranteed Term Classification (starting with the oldest Guaranteed Term
which has not reached maturity) in the same proportion as the value of each
Guaranteed Term Classification has to the total value of the Contract.
A Market Value Adjustment is applied to the amount surrendered if surrendered
prior to the end of a Guaranteed Term, except for values surrendered under
the Maturity Value Transfer Provision. The surrendered amount may also be
subject to a deferred sales charge and a maintenance fee. Please refer to the
applicable Contract prospectus for information regarding deferred sales
charges and maintenance fees.
When a request for a partial surrender of a specific dollar amount is made,
the Market Value Adjustment will be included in the determination of the
amount withdrawn from a Guaranteed Term to fulfill the request. Therefore,
the amount actually withdrawn from the Guaranteed Term(s) may be more or less
than the requested dollar amount. (See "Appendix I" for an example.)
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MARKET VALUE ADJUSTMENT
A Market Value Adjustment ("MVA") is applied to amounts transferred or
withdrawn from GAA prior to the end of a Guaranteed Term. In order to
accommodate these surrenders or transfers, the Company may need to liquidate
certain assets or use existing cash flow which would otherwise be available
to invest at current interest rates. The assets may be sold at a profit or a
loss depending upon market conditions. This MVA reflects the changes in
interest rates since the Deposit Period. When interest rates increase after
the Deposit Period, the value of the investment decreases and the Market
Value Adjustment Amount may become negative. Conversely, when interest rates
decrease after the Deposit Period, the value of the investment increases and
the Market Value Adjustment Amount may be positive.
The MVA is a factor applied to amounts withdrawn from a Guaranteed Term prior
to the end of the Guaranteed Term in connection with transfers (including
transfers made in order to elect a nonlifetime Annuity option) and
surrenders. Only a positive Aggregate Market Value Adjustment Amount, if any,
is applied to funds withdrawn from Guaranteed Terms due to the death of the
Participant if withdrawn within six months after the Participant's date of
death. After the six month period, the calculated Aggregate Market Value
Adjustment Amount (positive or negative) is applied. If funds are withdrawn
from Guaranteed Terms due to annuitization of the Contract under one of the
lifetime Annuity options only a positive Aggregate Market Value Adjustment
Amount, if any, is applied. If two or more consecutive Guaranteed Terms have
the same Guaranteed Interest Rate(s) and mature on the same date, the Company
will calculate MVA's applicable to each Guaranteed Term. The most favorable
MVA to the Contract Holder or Participant will be applied to any surrender or
transfer from either Guaranteed Term prior to the Guaranteed Terms' maturity.
Market Value Adjustment Amounts can be positive or negative and therefore the
imposition of an MVA may increase or decrease the amount withdrawn from a
Guaranteed Term to satisfy the request for surrender or transfer. The MVA
Amount depends on the relationship of the Deposit Period yield of U.S.
Treasury Notes that mature in the last quarter of the Guaranteed Term, to the
current yield of such U. S. Treasury Notes at the time of withdrawal. In
general, if the current yield is the lesser of the two, the MVA will decrease
the amount withdrawn from a Guaranteed Term to satisfy the request for
surrender or transfer; if the current yield is the higher of the two, the MVA
will increase the amount withdrawn from a Guaranteed Term to satisfy the
request for surrender or transfer.
The MVA involves a Deposit Period yield and a current yield. An adjustment is
made in the formula of the MVA to reflect the period of time remaining in the
Guaranteed Term from the Wednesday of the week of withdrawal. To determine
the Deposit Period yield and the current yield, certain information must be
obtained about the prices of outstanding U.S. Treasury issues. This
information may be found each business day in publications such as the Wall
Street Journal which publishes the yield-to-maturity percentages for all
Treasury Notes as of the preceding business day. These percentages are used
in determining the Deposit Period yield and the current yield for the MVA
calculation.
Deposit Period Yield
Determining the Deposit Period yield used in the MVA calculation involves
consideration of interest rates prevailing during the Deposit Period of the
Guaranteed Term from which the withdrawal will be made. First, the Treasury
Notes that mature in the last three months of the Guaranteed Term are
identified, and then, the yield-to-maturity percentages of these Treasury
Notes for the last business day of each week in the Deposit Period are
determined. The resulting percentages are then averaged to determine the
Deposit Period yield.
Current Yield
To determine the current yield, use the same Treasury Notes identified for
the Deposit Period yield:
Treasury Notes that mature in the last three months of the Guaranteed
Term. However, the yield-to-maturity percentages used are those for the last
business day of the week preceding the withdrawal. Average these percentages
to determine the current yield.
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For example, assume the withdrawal will be processed on May 16, 1996. List
the yield-to-maturity percentage figures as of May 10, 1996 for the same
Treasury Notes that determined the Deposit Period yield. Average these yields
to determine the current yield.
MVA Formula
The mathematical formula used to determine the MVA is:
x
---
365
(1 + i)
{-------}
(1 + j)
where "i" is the deposit period yield; "j" is the current yield; and "x" is
the number of days remaining (computed from Wednesday of the week of
withdrawal) in the Guaranteed Term. (For examples of how to calculate MVAs,
please refer to "Appendix I.")
CONTRACT CHARGES
Certain charges are deducted directly or indirectly from the funding options
available under the Contract.
If the Contract allows for the deduction of a maintenance fee on an annual
basis, the fee is deducted on a pro rata basis from all funding options,
including GAA. In addition, the maintenance fee is deducted upon total
surrender of a Contract.
A deferred sales charge, if applicable, is also deducted upon a full or
partial surrender of some Contracts. If the surrender occurs prior to the
maturity of a Guaranteed Term, the deferred sales charge and the MVA will be
assessed.
During each calendar year, the Contract Holder (or the Participant, if
authorized) may change the allocation of future Purchase Payments among the
investment options allowed by the Contract. Unlimited allocation changes are
allowed. In addition, we allow unlimited transfers of accumulated values to
available investment options during the Accumulation Period. We allow at
least 12 free transfers in any calendar year. Thereafter, under some
Contracts, we reserve the right to charge $10 for each subsequent transfer.
Mortality and expense risk charges and other asset-based charges that may be
deducted from variable funding options are not deducted from any credited
interest option under the Contract (including GAA). These charges are only
applicable to the variable funding options.
Please refer to the applicable Contract prospectus for further details on
Contract deductions. The Contract prospectus includes a full description of
the sales charges made upon withdrawal.
MISCELLANEOUS
Annuity Period
GAA cannot be used as an option during the Annuity Period. Prior to
annuitization, values in Guaranteed Terms must be transferred to one or more
of the funding options which allow for Annuity payments. The Aggregate Market
Value Adjustment Amount (positive or negative) is applied to any amount
transferred from Guaranteed Terms before the end of those Guaranteed Terms
due to annuitization to the nonlifetime Annuity option available under the
Contract. Only a positive Aggregate Market Value Adjustment Amount, if any,
is applied due to annuitization to a lifetime Annuity option. Please refer to
the applicable Contract Prospectus for a discussion of the Annuity Period.
Deferral of Payments
Under certain emergency conditions, the Company may defer payment of a GAA
surrender value for a period of up to 6 months. Please refer to the
applicable Contract Prospectus for further details.
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Reinstatement
The Contract Holder or, if applicable, the Participant may elect to reinstate
all or a portion of the proceeds received from a full surrender within 30
days after such surrender. Any amounts reinstated to GAA will be applied to
the current Deposit Period. Within the current Deposit Period, amounts are
then proportionately reinstated to the Guaranteed Term Classifications in the
same manner as the amounts were allocated prior to surrender. Any negative
MVA amount applied to a surrender is not included in the reinstatement.
Please refer to the applicable Contract prospectus for further details on
reinstatement of the Contract.
Contract Loans (403(b) Plans Only)
The GAA value is included in determining the value of a Contract against
which a loan may be made. However, loans may not be made from amounts held in
GAA. In order to receive amounts held in GAA as a loan, the amounts must
first be transferred to a funding option from which loans may be made (see
the applicable Contract prospectus for further information on Contract
loans). Amounts transferred from Guaranteed Terms due to a loan request will
be subject to an MVA.
INVESTMENTS
Amounts applied to Guaranteed Terms under the Short-Term Classification of
GAA will be deposited into the Company's general account which supports
insurance and annuity obligations.
General account assets of the Company must be invested in accordance with
applicable state laws. These laws govern the nature and quality of
investments that may be made by life insurance companies and the percentage
of their assets that may be committed to any particular type of investment.
In general, these laws permit investments, within specified limits and
subject to certain qualifications, in federal, state and municipal
obligations; corporate bonds; preferred stocks; real estate mortgages; real
estate and certain other fixed income investments. All of the general assets
of the Company, including amounts deposited to GAA, are available to meet the
guarantees under GAA. These assets are chargeable with liabilities arising
out of any other business of the Company.
Amounts applied to Guaranteed Terms under the Long-Term Classification of GAA
will be deposited to and accounted for in a noninsulated, nonunitized
separate account established under Title 38a, Section 38a-433, of the
Connecticut General Statutes. A nonunitized separate account is a separate
account in which the Contract Holder or Participant does not participate in
the performance of the assets through unit values or any other interest. The
assets of the noninsulated, nonunitized separate account may be charged with
liabilities arising out of any other business of the Company.
Contract Holders and Participants allocating funds to the Long-Term
Classification of GAA do not receive a unit of ownership of assets accounted
for in this separate account. The assets accrue solely to the benefit of the
Company. Contract Holders and Participants do not participate in the
investment gain or loss from assets accounted for in the separate account.
Such gain or loss is borne entirely by the Company. All benefits available to
Participants under the Long-Term Classification of GAA are Contract
guarantees made by the Company and are accounted for in the separate account.
These general account assets are chargeable with liabilities arising out of
any other business of the Company.
The Company intends to invest in assets which, in the aggregate, have
characteristics, especially cash flow patterns, reasonably related to the
characteristics of the liabilities. Various immunization techniques will be
used to achieve the objective of close aggregate matching of assets and
liabilities. The Company will primarily invest in investment-grade fixed
income securities including:
(bullet) Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government.
(bullet) Debt securities which have an investment grade, at the time of
purchase, within the four highest grades assigned by Moody's
Investors Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's
Corporation (AAA, AA, A or BBB) or any other nationally recognized
rating service.
(bullet) Other debt instruments, including, but not limited to, issues of or
guaranteed by banks or bank holding companies and of corporations
which obligations although not rated by Moody's, Standard & Poor's,
or other
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<PAGE>
nationally recognized rating services, are deemed by the Company's
management to have an investment quality comparable to securities
which may be purchased as stated above.
(bullet) Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year which are
considered by the Company's management to have investment quality
comparable to securities which may be purchased as stated above.
In addition, the Company may invest in futures and options. Financial futures
and related options thereon and options on securities are purchased solely
for non-speculative hedging purposes. In the event the securities prices are
anticipated to decline, the Company may sell a futures contract or purchase a
put option on futures or securities to protect the value of securities held
in or to be sold for the general account or the nonunitized separate account.
Similarly, if securities prices are expected to rise, the Company may
purchase a futures contract or a call option thereon against anticipated
positive cash flow or may purchase options on securities.
WHILE THE FOREGOING GENERALLY DESCRIBES THE INVESTMENT STRATEGY OF GAA, THE
COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACTS
ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS MAY BE REQUIRED BY
CONNECTICUT AND OTHER STATE INSURANCE LAWS NOR WILL THE GUARANTEED INTEREST
RATES ESTABLISHED BY THE COMPANY UNDER THE LONG-TERM CLASSIFICATION
NECESSARILY RELATE TO THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION OF CONTRACTS
The Company will serve as Underwriter for the securities sold herein. The
Company is registered as a broker-dealer with the Securities and Exchange
Commission and is a member of the National Association of Securities Dealers,
Inc. (NASD). As Underwriter, the Company will contract with one or more
registered broker-dealers ("Distributors") to offer and sell the Contracts.
The Company and one or more affiliates may also sell the Contracts directly.
All registered representatives for the Distributor will also be licensed as
insurance agents to sell Variable Annuity Contracts. For additional
information, see the Contract Prospectus.
TAX CONSIDERATIONS
Contract Holders and Participants should seek advice from their tax advisers
as to the application of federal (and where applicable, state and local) tax
laws to amounts received by them and by their beneficiaries under the
Contracts. Please refer to the applicable Contract Prospectus for further
information.
Taxation of the Company
The Company is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code. All assets supporting the Annuity obligations
of GAA are owned by the Company. Any income earned on such assets is
considered income to the Company.
Taxation of Annuities
Generally, any income earned on GAA deposits is not taxable to individual
Contract Holders or Participants until distributed from the Contract. For
further information concerning the tax treatment of Purchase Payments and
distributions from the Contracts, please refer to the applicable Contract
Prospectus.
THE COMPANY
History and Business
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized in 1976 under the insurance laws of Connecticut. Aetna Life
Insurance and Annuity Company, together with its two wholly owned
subsidiaries, Aetna Insurance Company of America and Aetna Private Capital,
Inc., is hereafter called the "Company". The Company is a wholly owned
subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly
owned
14
<PAGE>
subsidiary of Aetna Life and Casualty Company ("Aetna") which, with Aetna's
subsidiaries, constitutes one of the nation's largest insurance/financial
services organizations based on its assets at December 31, 1994. Two
subsidiaries, Systematized Benefits Administrators, Inc. ("SBA") and Aetna
Investment Services, Inc. ("AISI"), which were previously reported with the
Company's operations were distributed in the form of dividends to ARSI in
December of 1995. The impact to the Company's operations of distributing
these dividends was immaterial. The Company's Home Office is located at 151
Farmington Avenue, Hartford, Connecticut 06156.
The Company markets a variety of life insurance, retirement and other
savings and investment products including individual and group annuities,
financial services and mutual funds. The Company's products are designed for
individuals, pension plans, small businesses and employer-sponsored groups.
The Company's operations are reported through two major business segments:
financial services and life insurance.
Financial Services Segment
The financial services segment includes individual and group annuity
products which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under Internal
Revenue Code Sections 401, 403, 408, and 457, and individual and group
nonqualified annuity contracts. These contracts may be immediate or deferred
and are offered primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government, education
(collectively "not-for-profit" organizations) and corporate markets. The
Company also offers life insurance supplemental contracts. Financial services
also include pension plan administrative services. In 1995, the Company
discontinued writing structured settlements of certain liabilities.
Annuity products typically offer fixed (fully guaranteed and experience
rated) investment options and variable investment options (discussed below).
For fully guaranteed and experience rated options the Company earns a spread
representing the difference between income on investments and interest
credited to customer reserves.
The Company's variable products (variable annuity and variable life
contracts) utilize Separate Accounts to provide contractholders with a
vehicle for investments under which the contractholders assume the investment
risks as well as the benefit of favorable performance. Assets held under
these products are invested, as designated by the contractholder or
participant under a contract, in Separate Accounts, which in turn invest in
shares of mutual funds that are managed by the Company or other selected
mutual funds that are not managed by the Company. The Company acts as an
investment adviser for its affiliated mutual funds (a retail fund--Aetna
Series Fund, Inc. and variable products funds--Aetna Variable Fund, Aetna
Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund,
Aetna Get Fund Series B) and receives advisory fees for its investment
management services. The Company also receives from the Aetna Series Fund,
Inc. service fees for providing administrative and shareholder services and
distribution fees for promoting sales of the Adviser Class shares. The
Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable annuity contracts (actuarial margin)
(see Note 8 of the Notes to the Consolidated Financial Statements).
Product retention is a key driver of profitability for annuity products.
To encourage product retention, annuity contracts typically impose a
surrender charge on policyholder balances withdrawn for a period of time
after the contract's inception. The period of time and level of the charge
vary by product. In addition, a new approach being incorporated into recent
variable contracts with fixed interest account investment options allows
contractholders to receive an incremental interest rate if withdrawals from
the fixed account are spread over a period of five years. Further, more
favorable credited rates may be offered after policies have been in force for
a period of time. Existing tax penalties on annuity distributions prior to
age 59-1/2 provide an additional disincentive to premature surrenders of
annuity balances, but do not impede transfers of those balances to products
of other competitors.
Certain of the Company's annuity products allow customers to borrow
against their policies. Outstanding policy loans on annuity policies at
December 31, 1995 were $181.3 million. Net investment income on annuity
policy loans was $4.0 million for the year ended December 31, 1995.
In the financial services segment markets, competition arises from other
insurance companies, banks, mutual funds and other investment managers.
Principal competitive factors are cost, service, level of investment
performance and the perceived financial strength of the investment manager or
sponsor. Competition in financial services markets may affect, among other
matters, both business growth and the pricing of the Company's products and
services.
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<PAGE>
Products sold in the corporate pensions market are sold through pension
professionals, stock brokers and third party administrators who work closely
with salaried field office employees. Products sold in the not-for-profit
organization market are distributed primarily through dedicated career
agents, registered life brokers and broker/dealers. Products sold in the
individual market are distributed primarily through dedicated career agents,
registered life brokers, banks and broker/dealers.
Reserves for limited payment contracts (immediate annuities with life
contingent payout) are computed on the basis of assumed investment yield,
mortality, morbidity and expenses (including a margin for adverse deviation),
which generally vary by plan, year of issue and policy duration. Reserves for
investment contracts (deferred annuities and immediate annuities without life
contingent payouts) are equal to cumulative deposits plus credited interest
less charges thereon. Of those investment contracts which are
experience-rated, the reserves also reflect net realized capital gains/losses
(which the Company reflects through credited rates on an amortized basis) and
unrealized capital gains/losses related to Financial Accounting Standard
("FAS") No. 115 (see Note 1 of the Notes to the Consolidated Financial
Statements).
The following table summarizes assets under management for the principal
customer groups of the financial services segment. Amounts reflected exclude
unrealized gains (losses) of $689.9 million and $(337.7) million at December
31, 1995 and 1994, respectively, related to market value adjustments required
under FAS 115. See Management's Analysis of the Results of Operations and
Note 1 for further discussion on assets under management and FAS 115,
respectively.
- ------------------------------------------------------------------
(Millions) 1995 1994 1993
- ----------------- --------- --------- --------- ---------
Corporate
pensions $ 4,233.5 $ 3,217.4 $ 2,886.2
Not-for-profit
organizations 12,086.1 10,025.9 9,087.1
Individuals 6,214.8 4,879.6 3,981.0
--------- --------- --------- ---------
Total $22,534.4 $18,122.9 $15,954.3
- ----------------- --------- --------- --------- ---------
Deposits, which are not included in premiums or revenue, are shown in the
following table for the years indicated:
- ------------------------------------------------------------------
(Millions) 1995 1994 1993
- ----------------- --------- --------- --------- ---------
Corporate
pensions $1,075.9 $ 890.3 $ 714.5
Not-for-profit
organizations 1,093.0 1,093.3 1,107.8
Individuals 1,200.6 670.2 460.9
--------- --------- --------- ---------
Total $3,369.5 $2,653.8 $2,283.2
- ----------------- --------- --------- --------- ---------
Life Insurance Segment
The life insurance segment includes universal life, variable universal life,
interest-sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer-sponsored groups and
executives of Fortune 2000 companies. The Company's universal life insurance
product accounted for approximately 92% of individual life insurance sales in
1995.
The Company's in-force block of insurance includes a sizable block of
traditional ordinary life insurance originally written by an affiliate, Aetna
Life Insurance Company ("Aetna Life"), and transferred to the Company via a
reinsurance agreement in 1988 (see Note 8 of the Notes to the Consolidated
Financial Statements). This closed book of business contributed 29% of the
life insurance segment's earnings in 1995.
Universal life products include a cash value component that is credited with
interest at competitive rates. The Company earns the spread between
investment income and interest credited on customer cash values. Universal
life cash values are charged for cost of insurance coverage and for
administrative expenses. The Company is also compensated by the Separate
Accounts for bearing mortality and expense risks pertaining to variable
universal life contracts.
Life insurance products typically require high costs to acquire business. As
with the financial services segment, retention is an important driver of
profitability and is encouraged through product features. For example,
universal and interest-sensitive whole life insurance contracts typically
impose a surrender charge on policyholder balances withdrawn within seven to
twenty years of the contract's inception or for variable life within ten
years. The period of time and level of the charge vary by product. In
addition, more favorable credited rates and policy loan terms may be offered
after policies have been in force for a period of time. To further encourage
retention, life insurance agents are typically paid renewal commissions or
service fees.
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<PAGE>
Certain of the Company's life insurance products allow customers to borrow
against their policies. Outstanding policy loans on individual life policies
at December 31, 1995 were $157.3 million. Net investment income on individual
life policy loans was $9.7 million for the year ended December 31, 1995.
The markets for life insurance products are highly competitive among
insurance companies. Competition largely is based upon product features and
prices. Competition in life insurance markets may affect, among other
matters, both business growth and the pricing of the Company's products and
services.
Life insurance products are marketed by managing general agents, regional
brokers, banks and broker/dealers.
Reserves for universal life and interest-sensitive whole life products
(which are all experience-rated) are equal to cumulative deposits less
withdrawals and charges, plus credited interest thereon, plus/less net
realized capital gains/ losses (which the Company reflects through credited
rates on an amortized basis). These reserves also reflect unrealized capital
gains/losses related to FAS 115. Reserves for all other fixed individual life
contracts are computed on the basis of assumed investment yield, mortality,
morbidity and expenses (including a margin for adverse deviation), which
generally vary by plan, year of issue and policy duration. These reserves are
computed amounts that, with additions from premiums and deposits to be
received, and with interest on such reserves compounded annually at assumed
rates, are expected to be sufficient to meet the Company's policy obligations
at their maturities or to pay expected death or retirement benefits or other
withdrawal requests.
Reinsurance arrangements with affiliated and non-affiliated insurance
companies are utilized to limit exposure to losses in excess of predetermined
amounts per individual life. The Company's retention limit per individual
life is $2.0 million (see Notes 8 and 9 of the Notes to the Consolidated
Financial Statements).
Life Insurance in Force and Other Statistical Data*
The following table summarizes changes in individual life insurance in force
before deductions for reinsurance ceded to other companies for the years
indicated:
(Millions, except as noted below) 1995 1994 1993
----------------------------------- ---------- ---------- -----------
Sales and additions:
Direct:
Permanent $ 3,757.9 $ 3,369.4 $ 2,767.0
Term 2,600.4 559.9 237.2
Assumed:
Permanent 1,358.5 -- --
---------- ---------- -----------
Total $ 7,716.8 $ 3,929.3 $ 3,004.2
========== ========== ===========
Terminations:
Direct:
Surrenders and Conversions $ 1,467.0 $ 1,316.4 $ 1,632.6
Lapses 891.4 860.9 816.7
Other 152.7 170.0 170.6
Assumed:
Surrenders and Conversions 53.6 59.4 80.3
Lapses 331.8 303.9 376.2
Other 54.2 57.9 55.1
---------- ---------- -----------
Total $ 2,950.7 $ 2,768.5 $ 3,131.5
========== ========== ===========
In force:
Direct:
Permanent $32,333.2 $30,563.0 $29,507.1
Term 3,698.3 1,621.3 1,095.2
Assumed:
Permanent 2,392.9 1,244.8 1,344.9
Term 1,203.8 1,433.0 1,754.1
---------- ---------- -----------
Total $39,628.2 $34,862.1 $33,701.3
========== ========== ===========
Number of direct policies in force
(thousands) 378.1 378.3 384.6
========== ========== ===========
Average size of direct policy in
force (thousands) $ 95.3 $ 85.1 $ 79.6
========== ========== ===========
*Only nonparticipating business is written by the Company.
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General Account Investments
Consistent with the nature of the contract obligations involved in the
Company's operations, the majority of the general account assets are invested
in long-term, debt securities such as corporate debt securities, residential
mortgage-backed securities, commercial and multifamily mortgage-backed
securities, other asset-backed securities and government securities. It is
management's objective that the portfolios be of high quality while achieving
competitive investment yields and returns. Investment portfolios generally
match the duration of the insurance liabilities they support. The general
account of the Company has been segmented to improve the asset/liability
matching process. The duration of investments is monitored and security
purchases and sales are executed with the objective of having adequate funds
available to satisfy the Company's maturing liabilities.
Please see Investments in the Management's Analysis of the Results of
Operations for a further discussion of investments. For information
concerning the valuation of investments, see Notes 1, 2 and 3 of the Notes to
Consolidated Financial Statements.
Other Matters
Regulation. The insurance business of the Company is subject to
comprehensive, detailed regulation throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad authority
to regulate, among other things, the granting of licenses to transact
business, trade practices, agent licensing, policy forms, underwriting and
claims practices, reserve adequacy, insurer solvency, the maximum interest
rates that can be charged on life insurance policy loans, the minimum rates
that must be provided for accumulation of surrender values, the form and
content of required financial statements and the type and amounts of
investments permitted. The Company is required to file detailed reports with
supervisory agencies in each of the jurisdictions in which it does business,
and its operations and accounts are subject to examination by such agencies
at regular intervals.
Although the federal government does not directly regulate the business of
insurance, many federal laws do affect the business. Existing or recently
proposed federal laws that may significantly affect or would affect, if
passed, the insurance business cover such matters as pensions and other
employee benefits, removal of barriers preventing banks from engaging in the
insurance and mutual fund businesses, the taxation of insurance companies,
and the tax treatment of insurance products.
Material changes in applicable federal and state laws and regulations could
adversely affect the Company's business operations, although the Company is
unable to predict whether any such changes will be implemented.
Several states, including Connecticut, regulate affiliated groups of insurers
such as the Company and its affiliates under insurance holding company
statutes. Under such laws, intercorporate asset transfers and dividend
payments from insurance subsidiaries may require prior notice to or approval
of the insurance regulators, depending on the size of such transfers and
payments relative to the financial position of the Company making the
transfer. Changes in control also are regulated under these laws. As a
Connecticut-domiciled insurance company, the Company is subject to
comprehensive regulation under the Connecticut insurance laws and by the
Connecticut Insurance Department.
In recent years, state insurance regulators have been considering changes in
statutory accounting practices and other initiatives to strengthen solvency
regulation. The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital ("RBC") standards for life insurers. The RBC
formula is a regulatory tool designed to identify weakly capitalized
companies by comparing the adjusted surplus to the required surplus, which
reflects the risk profile of the Company (RBC ratio). Within certain ratio
changes, regulators have increasing authority to take action as the RBC ratio
decreases. There are four levels of regulatory action ranging from requiring
insurers to submit a comprehensive plan to the state insurance commissioner
to when the state insurance commissioner places the insurer under regulatory
control. The Company's RBC ratio at December 31, 1995 was significantly above
the levels which would require regulatory action. Rating agencies also use
their own risk-based capital standards as part of determining a company's
rating.
The NAIC also is considering several other solvency-related regulations
including the development of a model investment law and amendments to the
model insurance holding company law which would limit types and amounts of
insurance company investments. In addition, in recent years there has been
growing interest among certain members of Congress concerning possible
federal roles in the regulation of the insurance industry. Because these
other initiatives are in a preliminary stage, management cannot assess the
potential impact of their adoption on the Company.
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<PAGE>
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for
certain obligations of insolvent insurance companies to policyholders and
claimants. The after tax charges to earnings for guaranty fund obligations
for the years ended December 31, 1995, 1994 and 1993 were $1.4 million, $0.6
million and $0.9 million, respectively. The amounts ultimately assessed may
differ from the amounts charged to earnings thus far because such assessments
may not be made for several years and will depend upon the final outcome of
regulatory proceedings.
The Company provides a variety of products and services to employee benefit
plans that are covered by the Employee Retirement Income Security Act of 1974
("ERISA"). In December 1993, in a case involving an employee benefit plan and
an insurance company, the United States Supreme Court ruled that assets in
the insurance company's general account that were attributable to the
non-guaranteed portion of a group pension contract issued to the plan were
"plan assets" for purposes of ERISA and that the insurance company was an
ERISA fiduciary with respect to those assets. In reaching its decision, the
Court declined to follow a 1975 Department of Labor ("DOL") interpretive
bulletin that had suggested that insurance company general account assets
were not plan assets. The Company and other insurers are seeking
clarification from the DOL of the effects, if any, of the decision on their
businesses, as well as pursuing clarification of the decision through Federal
legislation. Management is not currently able to predict how the decision, or
the outcome of any legislative or regulatory initiatives, will ultimately
affect its business.
Aetna Life Insurance and Annuity Company is regulated by the Securities and
Exchange Commission ("SEC") and some state securities regulators as a
broker-dealer and investment adviser. The Company's variable products involve
investments through Separate Accounts, some of which are registered as
investment companies with the SEC, as are the retail mutual funds and the
variable mutual funds offered by the Company. Additionally, interests in some
of the Separate Accounts, the retail mutual funds, the variable product
mutual funds and certain other products used as funding vehicles for the
Company's variable products are registered with the SEC. Shares of the retail
mutual funds are also registered with all fifty of the state securities
regulators.
Miscellaneous. According to the Fortune Service 500, as of December 31,
1994, the Company ranked 19th and 22nd among all United States domiciled life
insurance companies based upon total assets and premium income, respectively.
As of December 31, 1995, the Company had approximately 2,700 employees.
The Company's rating at February 6, 1996 by A.M. Best was A+ (Superior).
Management believes that the Company's computer facilities, systems and
related procedures are adequate to meet its business needs. The Company's
data processing systems and backup and security policies, practices and
procedures are regularly evaluated by the Company's management and internal
auditors and are modified as considered necessary.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of revenue in 1995. In addition, neither segment
of the Company's business is dependent upon a single customer or a few
customers, the loss of which would have a significant impact on the segment.
See Note 12 of the Notes to the Consolidated Financial Statements regarding
segment information.
Forward-Looking Information. The Private Securities Litigation Reform Act
of 1995 ("the Act") provides a new "safe harbor" for forward-looking
statements to encourage companies to provide prospective information about
their companies, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the statement. The Company desires to take
advantage of the new "safe harbor" provisions of the Act. Certain information
contained herein, particularly the information appearing under the heading
"Outlook" contained in Management's Analysis of the Results of Operations, is
forward-looking. Information regarding certain important factors that could
cause actual results of operations or outcomes of other events to differ
materially from any such forward-looking statement appear together with such
statement within this section and within Management's Analysis of the Results
of Operations.
Properties
The Company occupies office space which is owned or leased by Aetna Life
Insurance Company or other affiliates. Expenses associated with these offices
are allocated on a direct and indirect basis to the Company and the other
subsidiaries of Aetna.
19
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following are the Directors and Executive Officers of the Company. The
terms of office for all Directors and Executive Officers will run until the
Company's next annual meeting and until their successors are duly elected and
qualified.
<TABLE>
<CAPTION>
Principal Occupation and
Current Position Employment During Past Five Years;
Name, Age with the Company Other Directorships of Directors
------------- ------------------- ---------------------------------------------------------
<S> <C> <C>
Daniel P. Director, President President (since December 1993), Aetna Life Insurance and
Kearney and Chief Executive Annuity Company; Executive Vice President (since December
Age 56 Officer 1993), and Group Executive, Financial Division (February
1991 - December 1993), Aetna Life and Casualty Company.
Director: Aetna Investment Services, Inc. (since November
1994); Aetna Insurance Company of America (since May
1994); MBIA, Inc. (since 1992).
Christopher Director and Senior Senior Vice President, Sales & Service (since February
J. Burns Vice President 1996), and Senior Vice President, Life (March 1991 -
Age 49 February 1996), Aetna Life Insurance and Annuity Company.
Director: Aetna Financial Services, Inc. (since January
1996), Aetna Investment Services, Inc. (since July 1993).
Laura R. Director and Senior Senior Vice President, Manage/Design Products and
Estes Vice President Services (since February 1996), and Senior Vice
Age 46 President, Pensions (March 1991 - February 1996), Aetna
Life Insurance and Annuity Company. Director: Aetna
Financial Services, Inc. (since January 1996); Aetna
Investment Services, Inc. (since July 1993).
Timothy A. Director, Senior Senior Vice President, Strategy & Finance, and Chief
Holt Vice President and Financial Officer (since February 1996), Aetna Life
Age 43 Chief Financial Insurance and Annuity Company; Vice President, Portfolio
Officer Management/Investment Group (August 1992 - February
1996), Aetna Life and Casualty Company; Treasurer
(February 1990 - July 1991), Aeltus Investment
Management, Inc.
Gail P. Director and Vice Vice President, Service and Retain Customers (since
Johnson President February 1996); Vice President, Defined Benefit Services
Age 45 (September 1994 - February 1996); Vice President, Plan
Services, Pensions and Financial Services (December 1992
- September 1994); Managing Director, Business Strategy
(July 1991 - December 1992); Assistant Vice President,
Financial Division (June 1987 - July 1991);-- Aetna Life
Insurance and Annuity Company.
John Y. Kim Director and Senior President (since December 1995), Aeltus Investment
Age 35 Vice President Management, Inc.; Chief Investment Officer (since May
1994), Aetna Life and Casualty Company; Managing Director
(September 1993 - April 1994), Mitchell Hutchins
Institutional Investors (New York, New York); Vice
President and Senior Portfolio Manager (October 1991 -
August 1993), and Vice President, Investor Relations
(1990 - 1992), Aetna Life and Casualty Company.
20
<PAGE>
Shaun P. Director and Vice Vice President, Products Group (since February 1996);
Mathews President Senior Vice President, Strategic Markets and Products
Age 40 (February 1993 - February 1996); and Senior Vice
President, Mutual Funds (March 1991 - February 1993) --
Aetna Life Insurance and Annuity Company. Director: Aetna
Investment Services, Inc. (since July 1993); Aetna
Insurance Company of America (since February 1993).
Glen Salow Director and Vice Vice President, Information Technology (since February
Age 41 President 1996), Vice President, Information Technology,
Investments and Financial Services (February 1995 -
February 1996), Vice President, Investment Systems (1992
- 1995), AIT -- Aetna Life Insurance and Annuity Company;
Senior Vice President (December 1986 - August 1992),
Lehman Brothers.
Creed R. Director and Vice Vice President, Select and Manage Markets (since February
Terry President 1996), Market Strategist (August 1995 - February 1996) --
Age 52 Aetna Life Insurance and Annuity Company; President (1991
- 1995), Chemical Technology Corporation (a subsidiary of
Chemical Bank).
Zoe Baird Senior Vice Senior Vice President and General Counsel (since April
Age 43 President and 1992), Vice President and General Counsel (July 1990 -
General Counsel April 1992), Aetna Life and Casualty Company. Director:
Zurn Industries, Inc. (since April 1993); Southern New
England Telecommunication Corp. and Southern New England
Telephone Company (since November 1990).
Susan E. Corporate Secretary Counsel (since November 1993), Aetna Life and Casualty
Schechter and Counsel Company; Associate Attorney (September 1986 - October
Age 43 1993), Steptoe & Johnson.
Eugene M. Vice President and Vice President and Treasurer, Corporate Controller (since
Trovato Treasurer, February 1996), Vice President and Controller (February
Age 45 Corporate 1995 - February 1996), Aetna Life Insurance and Annuity
Controller Company; Vice President, Financial Reporting (December
1991 - February 1995), Assistant Vice President,
Financial Reporting (June 1989 - December 1991), Aetna
Life and Casualty Company.
Diane B. Horn Vice President and Vice President and Chief Compliance Officer (since
Age 51 Chief Compliance February 1996), and Senior Compliance Officer (August
Officer 1993 - February 1996), Aetna Life Insurance and Annuity
Company; Director of Compliance (May 1991 - July 1993),
Kemper Life Insurance Company.
</TABLE>
21
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of the Company may also serve one or more affiliated
companies of Aetna Life Insurance and Annuity Company. Allocations have been
made as to each individual's time devoted to his or her duties as an
executive officer of the Company. The following table shows the cash
compensation paid, based on these allocations, to the seven most highly
compensated executive officers whose allocated compensation exceeds $100,000
for services rendered in all capacities to the Company during 1995. Such
officers may also receive non-cash compensation from other affiliated
companies of the Company; however, none of such non-cash compensation is
allocated to the Company.
CASH COMPENSATION TABLE
Name of Individual Capacities in Cash
or Number in Group which served Compensation
---------------------- ----------------------- -------------
John Y. Kim Senior Vice President $776,353
Daniel P. Kearney President and CEO 588,196
Dominick J. Agostino Senior Vice President 543,678
Laura R. Estes Senior Vice President 342,904
Scott A. Striegel Senior Vice President 328,595
Christopher J. Burns Senior Vice President 290,558
Shaun P. Mathews Senior Vice President 263,607
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation
(2) Awards Payouts
------------------- ------------ ------------
Name and Securities Long-Term
Principal Underlying Incentive All other
Position (1) Year Salary Bonus Stock Option Plan Payouts Compensation
- ----------------- ---- -------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
John Y. Kim 1995 $250,000 $542,300 4,000 $ 0
1994 250,000 521,400 7,500
1993 166,000 55,000 2,600
Daniel P. Kearney 1995 $518,269 $485,000 82,500 $761,750 $33,683
1994 500,000 200,000 16,500 33,820
1993 476,442 300,000 17,000 32,885
Dominick J.
Agostino 1995 $250,000 $125,000 2,000 $ 78,114
1994 250,000 0 4,500
1993 0 0 0
Laura R. Estes 1995 $225,000 $135,000 8,000 $221,600
1994 210,000 120,000 6,000
1993 200,000 85,000 2,800
Scott A. Striegel 1995 $225,000 $105,000 8,000 $221,600
1994 210,000 64,000 6,000
1993 200,000 35,000 4,000 27,000
- ----------------- ---- -------- -------- ------------ ------------
</TABLE>
(1) See Cash Compensation Table above.
(2) Salary and bonus earned during the fiscal year for services rendered to
the Company and to other affiliated companies of the Company.
Stock Option Grants Table
The following table sets forth certain information concerning stock options
granted during 1995 by Aetna to the CEO and each of the four most highly
compensated executive officers of the Company (other than the CEO) in 1995.
The hypothetical grant date present values of stock options granted in 1995
shown below are presented pursuant to SEC rules and are calculated under the
modified Black-Scholes Model for pricing options. The gains, if any,
realizable upon exercise of stock options will depend upon the market price
of Aetna's Common Stock at the time the stock option is exercised. The
individuals named below will not be able to realize a gain from the stock
options granted unless, during the exercise period, the market price of
Aetna's Common Stock increases above the exercise price of the options. An
increase in the market price of Aetna's Common Stock would also benefit
Aetna's other shareholders.
22
<PAGE>
Stock Option Grants in 1995
<TABLE>
<CAPTION>
Individual Grants (1)
Number of Percent of
Securities Total
Underlying Stock Options Exercise
Stock Granted to Price Grant Date
Options Employees in Per Expiration Present
Name Granted 1995 Share Date Value (4)
- ----------------- ------------ ------------- -------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
John Y. Kim 4,000 (2) .2% $53.50 2/24/2005 $ 39,703(5)
Daniel P. Kearney 17,500 (2) .8% 53.50 2/24/2005 165,825(5)
65,000 (3) 3.1% 57.00 4/28/2005 652,116(6)
Dominick J.
Agostino 2,000 (2) .1% 53.50 2/24/2005 18,951(5)
Laura R. Estes 8,000 (2) .4% 53.50 2/24/2005 75,806(5)
Scott A. Striegel 8,000 (2) .4% 53.50 2/24/2005 75,806(5)
</TABLE>
(1) Granted under Aetna's 1994 Stock Incentive Plan (the Plan). The Plan
permits participants to use shares of Aetna's Common Stock to exercise
options. The Plan provides that the option price shall not be less than
100% of the fair market value of the Common Stock at the time the option
is granted. Under the Plan, options may be granted until April 30, 2001.
(2) Date of grant was February 24, 1995; initial exercise date is February
25, 1996; options vest in installments over a period of three years.
(3) Date of grant was April 28, 1995; initial exercise date is April 29,
1997; options vest over a period of three years provided certain
performance criteria have been met.
(4) Grant Date present values are calculated under the modified Black-Scholes
Model. The Black-Scholes Model is a mathematical formula used to value
options publicly traded in the securities markets and it assumes that
options are freely transferable. Because the employee stock options
granted above are not freely transferable, Aetna believes that the grant
date present values shown above may be overstated.
(5) The assumptions made and factors used by Aetna in the Black-Scholes Model
calculation for the options granted February 24, 1995 were as follows:
(i) a volatility factor of 0.226, representing the average of the
three-year and ten-year historical volatility factors for the Common
Stock determined as of the date of the option grant; (ii) a risk-free
rate of return of 7.47%, representing the 10-year U.S. Treasury bond rate
in effect on the date of the option grant; (iii) a dividend yield of
5.2%, representing Aetna's then current annual dividend, divided by the
Common Stock price on the date of the option grant; and (iv) a ten-year
option term, representing the full term of the option granted. To give
effect to the three-year vesting period of the options, the value of each
option was discounted by 20%, the percentage of options estimated to
expire due to turnover of all recipients of options during the vesting
period. No further discount to the option value calculated was taken to
give effect to the fact that the options are not freely transferable or
to the exercise or lapse of the options prior to the end of the ten-year
option period.
(6) The assumptions made and factors used by Aetna in the Black-Scholes Model
calculation for the options granted April 28, 1995 were as follows: (i) a
volatility factor of 0.229, representing the average of the three-year
and ten-year historical volatility factors for the Common Stock as of the
date of the option grant; (ii) a risk-free rate of return of 7.06%,
representing the 10-year U.S. Treasury bond rate in effect on the date of
the option grant; (iii) a dividend yield of 4.8%, representing Aetna's
then current annual dividend, divided by the Common Stock price on the
date of the option grant; and (iv) a ten-year option term, representing
the full term of the option granted. To give effect to the three-year
vesting period and the risk of forfeiture of the performance vested
options, the value of each option was discounted by 32.5%. No further
discount to the option value calculated was taken to give effect to the
fact that the options are not freely transferable or to the exercise or
lapse of the options prior to the end of the ten-year option period.
There is no assurance that the hypothetical present values of stock options
presented in the table above represent the actual values of such options. The
hypothetical values shown should not be construed as predictions by Aetna as
to the future value of its Common Stock.
23
<PAGE>
<TABLE>
<CAPTION>
Aggregated Stock
Options/SAR
Exercised in 1995 December 31, 1995 Stock Option/SAR Value Table
--------------- ----------------------- ----------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at in-the-Money Options
December 31, 1995 (2) at December 31, 1995 (3)
------------------------------- -------------------------------
Shares Value
Acquired Realized
upon upon
Name Exercise (1) Exercise Exercisable Unexercisable (4) Exercisable Unexercisable (4)
--------------- ------------ -------- ---------- ------------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John Y. Kim 0 $ 0 2,500 9,000 $ 56,875 $ 176,750
Daniel P.
Kearney 8,264 246,012 34,236 93,500 742,638 1,225,875
Dominick J.
Agostino 0 0 6,500 0 133,875 0
Laura R. Estes 5,200 84,425 8,800 12,000 200,750 182,000
Scott A.
Striegel 4,300 59,425 9,550 12,000 152,975 182,000
</TABLE>
(1) Includes 6,125 shares as to which Mr. Kearney received cash in lieu of
shares upon exercise of SARs.
(2) Tandem SARs are attached to exercisable stock options relating to 13,875
shares held by Mr. Kearney. No tandem SARs are attached to any
unexercisable stock options.
(3) Based on December 29, 1995 closing stock price of $69.25.
(4) Represents stock options which are not vested.
SECURITY OWNERSHIP OF MANAGEMENT
The Company's directors and officers do not beneficially own any outstanding
shares of stock of the Company. All of the outstanding shares of stock of the
Company are beneficially owned by its parent, Aetna Retirement Holdings,
Inc., which are indirectly held by Aetna Life and Casualty Company. The
percentage of shares of Aetna Life and Casualty Company beneficially owned by
any director of the Company, and by all directors and officers of the Company
as a group, does not exceed one percent (1%) of the class outstanding.
INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1995, have been included herein and in the
Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing herein and elsewhere in
the Registration Statement and upon the authority of such firm as experts in
accounting and auditing.
The reports of KPMG Peat Marwick LLP on the above-mentioned consolidated
financial statements and consolidated financial statement schedules refer to
a change in 1993 in the Company's methods of accounting for certain
investment in debt and equity securities.
LEGAL PROCEEDINGS
The Company and its Board of Directors know of no material legal proceedings
pending to which the Company is a party or which would materially affect the
Company.
LEGAL MATTERS
The validity of the securities offered by this Prospectus has been passed
upon by Susan E. Bryant, Esq. Counsel of the Company.
24
<PAGE>
APPENDIX I
EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS
The following are examples of Market Value Adjustment ("MVA") calculations
using several hypothetical Deposit Period yields and current yields. These
examples do not include the effect of any deferred sales charge that may be
assessed under the Contract upon withdrawal.
EXAMPLE I
Assumptions: Assumptions:
i, the Deposit Period yield, is 8% i, the Deposit Period yield, is 5%
j, the current yield, is 10% j, the current yield, is 6%
x, the number of days remaining x, the number of days remaining
(computed from Wednesday of the (computed from Wednesday of the
week of withdrawal) in the week of withdrawal) in the
Guaranteed Term, is 927. Guaranteed Term, is 927.
x x
--- ---
365 365
(1 + i) (1 + i)
MVA = {-------} MVA = {-------}
(1 + j) (1 + j)
927 927
--- ---
365 365
= (1.08) (1.05)
{-------} = {-------}
(1.10) (1.06)
= .9545 = .9762
In this example, the Deposit Period In this example, the Deposit Period
yield of 8% is less than the current yield of 5% is less than the current
yield of 10%; therefore, the MVA is yield of 6%; therefore, the MVA is
less than 1. The amount withdrawn less than 1. The amount withdrawn
from the Guaranteed Term is from the Guaranteed Term is
multiplied by this MVA. multiplied by this MVA.
If a withdrawal or transfer of a If a withdrawal or transfer of a
stated percentage is requested, the stated percentage is requested, the
value withdrawn from a Guaranteed value withdrawn from a Guaranteed
Term will reflect the deduction of Term will reflect the deduction of
the negative MVA Amount. However, if the negative MVA Amount. However, if
a withdrawal or transfer request of a a withdrawal or transfer request of a
specific dollar amount is requested, specific dollar amount is requested,
the amount withdrawn from a the amount withdrawn from a
Guaranteed Term will be increased to Guaranteed Term will be increased to
compensate for the negative MVA compensate for the negative MVA
Amount. For example, a withdrawal Amount. For example, a withdrawal
request to receive a check for $2,000 request to receive a check for $2,000
would result in a $2,095.34 would result in a $2,048.76
withdrawal from the Guaranteed Term. withdrawal from the Guaranteed Term.
25
<PAGE>
EXAMPLE II
Assumptions: Assumptions:
i, the Deposit Period yield, is 10% i, the Deposit Period yield, is 5%
j, the current yield, is 8% j, the current yield, is 4%
x, the number of days remaining x, the number of days remaining
(computed from Wednesday of the week (computed from Wednesday of the week
of withdrawal) in the Guaranteed of withdrawal) in the Guaranteed
Term, is 927. Term, is 927.
x x
--- ---
365 365
(1 + i) (1 + i)
MVA = {-------} MVA = {-------}
(1 + j) (1 + j)
927 927
--- ---
365 365
= (1.08) (1.05)
{-------} = {-------}
(1.10) (1.04)
= 1.0477 = 1.0246
In this example, the Deposit Period In this example, the Deposit Period
yield of 10% is greater than the yield of 5% is greater than the
current yield of 8%; therefore, the current yield of 4%; therefore, the
MVA is greater than 1. The amount MVA is greater than 1. The amount
withdrawn from the Guaranteed Term withdrawn from the Guaranteed Term is
is multiplied by this MVA. multiplied by this MVA.
If a withdrawal or transfer of a If a withdrawal or transfer of a
stated percentage is requested, the stated percentage is requested, the
value withdrawn from a Guaranteed value withdrawn from a Guaranteed
Term will reflect the addition of Term will reflect the addition of the
the positive MVA Amount. However, if positive MVA Amount. However, if a
a withdrawal or transfer request of withdrawal or transfer request of a
a specific dollar amount is specific dollar amount is requested,
requested, the amount withdrawn from the amount withdrawn from a
a Guaranteed Term will be decreased Guaranteed Term will be decreased to
to reflect the positive MVA Amount. reflect the positive MVA Amount. For
For example, a withdrawal request to example, a withdrawal request to
receive a check for $2,000 would receive a check for $2,000 would
result in a $1,908.94 withdrawal result in a $1,951.98 withdrawal from
from the Guaranteed Term. the Guaranteed Term.
26
<PAGE>
APPENDIX II
EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS
The following hypothetical examples show the Market Value Adjustment based on
a given current yield at various times remaining in the Guaranteed Term.
Table A illustrates figures based on a Deposit Period yield of 10%; Table B
illustrates figures based on a Deposit Period yield of 5%. The Market Value
Adjustment will have either a positive or negative influence on the amount
withdrawn from or remaining in a Guaranteed Term. Also, the amount of the
Market Value Adjustment generally decreases as the end of the Guaranteed Term
approaches.
TABLE A: Deposit Period Yield of 10%
Change
in
Deposit
Current Period Time Remaining to
Yield Yield Maturity of Guaranteed Term
- ------- ------- -----------------------------------------------------------
8 Years 6 Years 4 Years 2 Years 1 Year 3 Months
------- ------- ------- ------- ------ ---------
15% +5% -29.9% -23.4% -16.3% -8.5% -4.3% -1.1%
13% +3% -19.4 -14.9 -10.2 -5.2 -2.7 -0.7
12% +2% -13.4 -10.2 -7.0 -3.5 -1.8 -0.4
11% +1% -7.0 -5.3 -3.6 -1.8 -0.9 -0.2
9% -1% 7.6 5.6 3.7 1.8 0.9 0.2
8% -2% 15.8 11.6 7.6 3.7 1.9 0.5
7% -3% 24.8 18.0 11.7 5.7 2.8 0.7
5% -5% 45.1 32.2 20.5 9.8 4.8 1.2
TABLE B: Deposit Period Yield of 5%
Change
in
Deposit
Current Period Time Remaining to
Yield Yield Maturity of Guaranteed Term
- ------- ------ ----------------------------------------------------------
8 Years 6 Years 4 Years 2 Years 1 Year 3 Months
------- ------- ------- ------- ------ ---------
9% +4% -25.9% -20.1% -13.9% -7.2% -3.7% -0.9%
8% +3% -20.2 -15.6 -10.7 -5.5 -2.8 -0.7
7% +2% -14.0 -10.7 -7.3 -3.7 -1.9 -0.5
6% +1% -7.3 -5.5 -3.7 -1.9 -0.9 -0.2
4% -1% 8.0 5.9 3.9 1.9 1.0 0.2
3% -2% 16.6 12.2 8.0 3.9 1.9 0.5
2% -3% 26.1 19.0 12.3 6.0 2.9 0.7
1% -4% 36.4 26.2 16.8 8.1 4.0 1.0
27
<PAGE>
SELECTED FINANCIAL DATA
(Millions) 1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
Total Revenue $ 1,537.3 $ 1,332.2 $ 1,264.5 $ 1,176.1 $ 1,129.5
========= ========= ========= ========= =========
Net Income $ 175.9 $ 145.3 $ 142.9 $ 122.8 $ 89.8
========= ========= ========= ========= =========
Total Assets $27,144.9 $20,934.1 $20,135.7 $16,932.9 $15,154.0
========= ========= ========= ========= =========
MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
Consolidated Results of Operations: Operating Summary
Operating Summary (millions) 1995 1994 1993
- --------------------------------------- --------- --------- ---------
Premiums $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
--------------------------------------- --------- --------- ---------
Total revenue 1,537.3 1,332.2 1,264.5
--------------------------------------- --------- --------- ---------
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy
acquisition costs 43.3 26.4 19.8
--------------------------------------- --------- --------- ---------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
--------------------------------------- --------- --------- ---------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
--------------------------------------- --------- --------- ---------
Net income $ 175.9 $ 145.3 $ 142.9
======================================= ========= ========= =========
- ----------------------------------------------------------------------------
Deposits not included Fully
in premiums above: guaranteed $ 415.7 $ 249.0 $ 263.7
Experience-rated 1,428.0 1,351.4 1,216.8
Non-guaranteed 2,059.1 1,365.9 1,062.5
-------------- --------- --------- ---------
Total $ 3,902.8 $ 2,966.3 $ 2,543.0
---------------------- -------------- --------- --------- ---------
Assets under Fully
management: (1) guaranteed $ 3,399.6 $ 2,620.3 $ 2,423.5
Experience-rated 10,999.9 9,272.0 9,241.5
Non-guaranteed 11,522.9 8,064.6 7,111.0
-------------- --------- --------- ---------
Total $25,922.4 $19,956.9 $18,776.0
---------------------- -------------- --------- --------- ---------
(1) Included above are net unrealized capital gains (losses) of $797.1
million, $(386.4) million and $747.1 million at December 31, 1995, 1994
and 1993, respectively.
Overview
The Company's adjusted earnings (after-tax) follow (in millions):
1995 1994 1993
------ ------ -------
Net Income $175.9 $145.3 $142.9
Less:
Net realized capital gains 26.8 1.0 6.2
------ ------ -------
Adjusted earnings $149.1 $144.3 $136.7
====== ====== =======
The Company's adjusted earnings increased 3% in 1995 following a 6%
increase in 1994. Results in 1995 reflected improved earnings in the
financial services segment, while earnings in the life insurance segment were
level with the prior year. The improvement in earnings related to the
financial services segment reflected an increase in charges assessed against
policyholders and increased net investment income related to the growth in
assets under management which were partially offset by an increase in
operating expenses. This increase in operating expenses primarily
28
<PAGE>
reflects continued business growth. The improvement in 1994 adjusted earnings
reflected an increase in charges assessed against policyholders, primarily
due to an increase in the volume of business in force, partially offset by
increases in operating expenses, primarily related to the implementation of a
new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $25.1 billion, were 24% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
The Company's contracts typically impose surrender fees which decline over
the duration of the contract. Assets held under experience rated general
account options have transfer and withdrawal limitations. Withdrawals from
the fully guaranteed accumulation options prior to maturity include an
adjustment intended to reflect the estimated fair value of the assets
supporting the contract at the time of withdrawal. Approximately 91% and 90%
of assets under management at December 31, 1995 and 1994, respectively,
allowed for contractholder withdrawal, 63% and 57% of which, respectively,
are subject to market value adjustments or deferred surrender charges at
December 31, 1995.
SEGMENT RESULTS
Financial Services Segment
Operating Summary (millions) 1995 1994 1993
- --------------------------------------- --------- --------- ---------
Premiums $ 82.6 $ 70.2 $ 32.0
Charges assessed against policyholders 150.4 126.6 109.4
Net investment income 823.3 745.9 739.2
Net realized capital gains 37.8 1.4 9.1
Other income 35.4 2.0 3.1
--------------------------------------- --------- --------- ---------
Total revenue 1,129.5 946.1 892.8
--------------------------------------- --------- --------- ---------
Current and future benefits 704.4 639.9 624.1
Operating expenses 256.5 176.9 149.0
Amortization of deferred policy
acquisition costs 10.5 9.6 (1.4)
--------------------------------------- --------- --------- ---------
Total benefits and expenses 971.4 826.4 771.7
--------------------------------------- --------- --------- ---------
Income before federal income taxes 158.1 119.7 121.1
Federal income taxes 44.3 34.2 34.3
--------------------------------------- --------- --------- ---------
Net income $ 113.8 $ 85.5 $ 86.8
======================================= ========= ========= =========
- ----------------------------------------------------------------------------
Deposits not included Fully
in premiums above: guaranteed $ 415.7 $ 249.0 $ 263.7
Experience-rated 934.4 1,064.3 979.4
Non-guaranteed 2,019.4 1,340.5 1,040.1
-------------- --------- --------- ---------
Total $ 3,369.5 $ 2,653.8 $ 2,283.2
---------------------- -------------- --------- --------- ---------
Assets under Fully
management: (1) guaranteed $ 2,789.4 $ 1,999.1 $ 1,758.0
Experience-rated 9,034.5 7,803.2 7,801.1
Non-guaranteed 11,400.4 7,982.9 7,041.4
-------------- --------- --------- ---------
Total $23,224.3 $17,785.2 $16,600.5
---------------------- -------------- --------- --------- ---------
(1) Included above are net unrealized capital gains (losses) of $689.9
million, $(337.7) million and $646.2 million at December 31, 1995, 1994 and
1993, respectively.
Adjusted earnings in the Financial Services segment (after-tax) follow (in
millions):
1995 1994 1993
------ ------ -------
Net Income $113.8 $85.5 $86.8
Less:
Net realized capital gains 24.6 0.9 5.9
------ ------ -------
Adjusted earnings $ 89.2 $84.6 $80.9
====== ====== =======
Effective January 1, 1995 the Company assumed responsibility for two
service organizations, a plan administration service organization and a
payment and retiree administration service organization, from an affiliate,
with year-
29
<PAGE>
to-date combined adjusted income of $0.2 million. As a result, other income
and operating expenses include $39.1 million and $38.8 million, respectively,
for the year ended December 31, 1995.
Adjusted earnings increased 5% in both 1995 and 1994. The 1995 improvement
in adjusted earnings reflected an increase in charges assessed against
policyholders and increased net investment income related to the growth in
assets under management which were partially offset by an increase in
operating expenses. The 1994 improvement in adjusted earnings reflected an
increase in assets under management offset in part by an increase in
operating expenses.
Premiums, related to annuity contracts containing life contingencies,
increased by 18% in 1995, following a 119% increase in 1994. The 1995 and
1994 increases resulted primarily from increases in immediate annuity sales.
Deposits, related to annuity contracts not containing life contingencies,
reflected a 27% increase in 1995 following a 16% increase in 1994. Deposits
in 1995 included the assumption of a $300.1 million variable annuity block of
business from an unaffiliated insurer. Deposits in 1994 included the $205.0
million acquisition of a block of primarily individual annuity business from
an unaffiliated insurer.
Charges assessed against policyholders for certain annuity contracts
increased by 19% and 16% in 1995 and 1994, respectively, reflecting the
increase in assets under management.
Net investment income increased by 10% in 1995, reflecting the increase in
assets under management. Net investment income increased by 1% in 1994,
reflecting the increase in assets under management offset by a downward trend
in the net investment yield on the Company's portfolio of investments.
Current and future benefits increased by 10% and 3% in 1995 and 1994,
respectively, reflecting the increase in assets under management.
Operating expenses, excluding the impact of moving the two service
organizations into the Company as discussed above, increased by 23% in 1995
and 19% in 1994. The 1995 increase primarily reflects continued business
growth. The 1994 increase primarily reflected expenses associated with the
implementation of the new contract administration system.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $22.5 billion, were 24% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
Outlook
Sales of tax-qualified annuities are expected to continue to be strong in
1996. Sales of non-qualified products are expected to significantly exceed
1995 levels as relationships formed with broker/dealers and banks in 1995
build sales momentum. The Company intends to expand its retirement planning
capabilities. The Company expects to evaluate opportunities for growth of its
financial services businesses and strengthen their competitive position.
Life Insurance Segment
Operating Summary (millions) 1995 1994 1993
- ------------------------------------------- -------- -------- --------
Premiums $ 48.2 $ 54.0 $ 50.1
Charges assessed against policyholders 168.5 152.4 142.1
Net investment income 181.0 171.3 172.7
Net realized capital gains 3.5 0.1 0.4
Other income 6.6 8.3 6.4
------------------------------------------- -------- -------- --------
Total revenue 407.8 386.1 371.7
------------------------------------------- -------- -------- --------
Current and future benefits 210.9 214.2 194.3
Operating expenses 62.2 58.3 58.2
Amortization of deferred policy
acquisition costs 32.8 16.8 21.2
------------------------------------------- -------- -------- --------
Total benefits and expenses 305.9 289.3 273.7
------------------------------------------- -------- -------- --------
Income before federal income taxes 101.9 96.8 98.0
Federal income taxes 39.8 37.0 41.9
------------------------------------------- -------- -------- --------
Net income $ 62.1 $ 59.8 $ 56.1
=========================================== ======== ======== ========
30
<PAGE>
- ----------------------------------------------------------------------------
Deposits not included in
premiums above: Experience-rated $ 493.6 $ 287.1 $ 237.4
Non-guaranteed 39.7 25.4 22.4
-------------- -------- -------- --------
Total $ 533.3 $ 312.5 $ 259.8
-------------------------- -------------- -------- -------- --------
Assets under management: Fully
(1) guaranteed $ 610.2 $ 621.2 $ 665.5
Experience-rated 1,965.4 1,468.8 1,440.4
Non-guaranteed 122.5 81.7 69.6
-------------- -------- -------- --------
Total $2,698.1 $2,171.7 $2,175.5
-------------------------- -------------- -------- -------- --------
(1) Included above are net unrealized capital gains (losses) of $107.2
million, $(48.7) million and $100.9 million at December 31, 1995, 1994
and 1993, respectively.
Adjusted earnings in the Life Insurance segment (after-tax) follow (in
millions):
1995 1994 1993
------ ------ -------
Net Income $62.1 $59.8 $56.1
Less:
Net realized capital gains 2.2 0.1 0.3
------ ------ -------
Adjusted earnings $59.9 $59.7 $55.8
====== ====== =======
Adjusted earnings in 1995 remained level with the prior year adjusted
earnings, reflecting an increase in the volume of business in force as a
result of strong sales offset by an increase in operating expenses. Adjusted
earnings in 1994 increased 7% when compared to 1993 adjusted earnings. The
1994 adjusted earnings improvement reflected higher business in force offset
in part by lower net investment income.
Premiums, related to term and whole life insurance, decreased by 11% in
1995 following an 8% increase in 1994. The decrease in premiums in 1995 is
primarily due to lower whole life insurance premiums.
Deposits, related to universal life and interest-sensitive whole life
insurance, grew by 71% and 20% in 1995 and 1994, respectively. Deposits in
1995 included the assumption of a $172.4 million universal life block of
business from an unaffiliated insurer and also reflected strong first year
sales and retention. The increase in premiums and deposits in 1994 reflected
strong first year sales and retention.
Charges assessed against policyholders for universal life and
interest-sensitive whole life insurance increased 11% in 1995 and 7% in 1994
reflecting an increase in the volume of business in force.
Net investment income increased by 6% in 1995, reflecting an increase in
universal life assets under management offset in part by the downward trend
in the net investment yield on the Company's portfolio of investments. Net
investment income decreased 1% in 1994, reflecting the downward trend in the
net investment yield on the Company's portfolio of investments, offset by the
increase in universal life assets under management.
Current and future benefits decreased 2% in 1995 following a 10% increase
in 1994, reflecting improved mortality experience related to universal life
insurance. The increase in 1994 reflected higher mortality related to
universal life insurance. Amortization of deferred policy acquisition costs
increased by 95% in 1995, reflecting the growth in current and estimated
future gross profit margins related to universal life insurance. Amortization
of deferred policy acquisition costs decreased 21% in 1994, primarily
reflecting lower mortality margins related to universal life insurance.
Operating expenses increased 7% in 1995, reflecting continued business
growth. Operating expenses were level in 1994, reflecting savings from
previous restructurings.
Assets under management, excluding the effect of FAS 115, at December 31,
1995 of $2.6 billion, were 17% above 1994 levels, primarily reflecting
continued business growth and overall improvement in the stock and bond
markets.
31
<PAGE>
Outlook
Sales of life products through traditional channels (managing general
agents and regional brokers) are expected to continue to be strong in 1996.
Sales of life products through non-traditional distribution channels (banks,
broker/ dealers, worksite), are expected to significantly exceed 1995 levels
as the Company's retirement planning emphasis begins to build momentum.
General Account Investments
The Company's investment strategies and portfolios are intended to match the
duration of the related liabilities and provide sufficient cash flow to meet
obligations while maintaining a competitive rate of return. The duration of
these investments is monitored, and investment purchases and sales are
executed with the objective of having adequate funds available to satisfy the
Company's maturing liabilities. The risks associated with investments
supporting experience-rated products are assumed by those customers subject
to, among other things, certain minimum guarantees.
(Millions) 1995 1994
- ----------------------------------------------- --------- ----------
Debt securities $12,720.8 $10,191.4
Equity securities:
Non-redeemable preferred stock 57.6 47.2
Investment in affiliated mutual funds 191.8 181.9
Common stock 8.2 --
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership -- 24.4
--------- ----------
Total Investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
--------- ----------
Total Investments and Cash and Cash
Equivalents $13,922.1 $11,424.8
=============================================== ========= ==========
At December 31, 1995 and 1994, the Company's carrying value of investments
in debt securities were $12.7 billion and $10.2 billion, 95% and 94%,
respectively, of total general account invested assets. At December 31, 1995
and 1994, $10.0 billion and $8.0 billion, 79% and 78%, respectively, of total
debt securities supported experience-rated products.
It is management's objective that the portfolio of debt securities be of
high quality and be well-diversified by market sector. The debt securities in
the Company's portfolio are generally rated by external rating agencies, and,
if not externally rated, are rated by the Company on a basis believed to be
similar to that used by the rating agencies. The average quality rating of
the Company's debt security portfolio was AA- at December 31, 1995 and AA at
December 31, 1994.
Debt Securities
Quality Ratings Debt Securities Investments by Market Sector
12/31/95 12/31/95
- --------------------- -------------------------------------------------
AAA 46.0% U.S. Corporate Securities 44.7%
AA 11.7 Residential Mortgage-Backed Securities 25.2
A Foreign Securities--U.S. Dollar
25.4 Denominated 11.1
BBB 11.7 Asset-Backed Securities 7.9
BB 4.0 Commercial/Multifamily Mortgage-
B and
Below 1.2 Backed Securities 6.1
--------
100.0% U.S. Treasuries/Agencies 4.6
========
Other 0.4
------
100.0%
======
32
<PAGE>
Debt Securities
Quality Ratings Debt Securities Investments by Market Sector
12/31/94 12/31/94
- --------------------- -------------------------------------------------
AAA 56.7% U.S. Corporate Securities 34.2%
AA 8.3 Residential Mortgage-Backed Securities 32.1
A 23.3 U.S. Treasuries/Agencies 12.9
BBB Foreign Securites--U.S. Dollar
8.5 Denominated 9.7
BB 2.5 Asset-Backed Securities 6.7
B and Below 0.7 Commercial/Multifamily Mortgage-Backed
-------- Securities 4.0
100.0% Other 0.4
======== ------
100.0%
======
In 1995, as a result of a change in investment strategy, the Company
reduced its investments in U.S. Treasuries/ Agencies and residential
mortgage-backed securities and increased its investments in U.S. Corporate
securities (see Note 2 of the Notes to the Consolidated Financial
Statements). Investments in U.S. dollar denominated foreign corporations and
governments, asset-backed, and commercial/multifamily mortgage-backed
securities also increased.
Asset-backed securities (securities backed by auto loans, credit card
receivables, etc.) and commercial/ multifamily mortgage-backed securities
(securitized pools of mortgages) are predominantly AAA rated, and are not
subject to the prepayment risk of residential mortgage-backed securities.
Outlook
In 1996, the Company does not anticipate any major changes in market
sector weightings, but will continue to marginally increase exposure to
diversifying asset classes, such as securitized commercial mortgage-backed
securities. The average quality rating of the Company's portfolio is not
expected to change significantly. Duration is anticipated to remain fairly
constant and will be monitored and maintained in line with liability duration
to minimize interest rate risk.
Liquidity and Capital Resources
(Millions) 1995 1994 1993
---------- --------- -----------
Assets $27,144.9 $20,934.1 $20,135.7
========== ========= ===========
Shareholder's Equity $ 1,583.0 $ 1,088.5 $ 1,246.7
========== ========= ===========
Net Cash provided by Operating
Activities $ 309.1 $ 206.6 $ 179.5
========== ========= ===========
Net Cash used for Investing
Activities $(1,135.6) $ (908.5) $(1,151.5)
========== ========= ===========
Net Cash provided by Financing
Activities $ 772.0 $ 789.1 $ 1,117.5
========== ========= ===========
Cash and Cash Equivalents $ 568.8 $ 623.3 $ 536.1
========== ========= ===========
The consolidated assets and shareholder's equity amounts for the years ended
December 31, 1995, 1994 and 1993 reflect the implementation of FAS 115. See
Notes 1 and 3 of Notes to Consolidated Financial Statements.
Liquidity needs of the Company's businesses have generally been met by cash
provided by premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, fund withdrawals and operating expenses.
Bonds, redeemable preferred stocks and mortgage loans have durations that
were selected to approximate the durations of the liabilities they support.
The general account of the Company has been segmented to improve the asset/
liability matching process. The duration of these investments is monitored,
and investment purchases and sales are executed with the objective of having
adequate funds available to satisfy the Company's maturing liabilities.
As the Company's investment strategy focuses on matching asset and liability
durations, and not specific cash flows, and additionally, since these
duration assessments are dependent on numerous cash flow assumptions, asset
sales may be required, from time to time, to satisfy liability obligations
and/or rebalance asset portfolios. The investment
33
<PAGE>
portfolios are closely monitored to assess asset and liability matching in
order to rebalance the portfolios as conditions warrant. The Company has
several alternatives available to meet any such unanticipated demands should
they occur. These include liquidating the Company's substantial cash and cash
equivalents or selling liquid, high quality mortgage-backed securities and
corporate bonds.
The Company's cash flow requirements for 1995 and 1994 were met by funds
provided from operations and from the maturity and sale of investments.
The Company has no debt. There were no capital contributions in 1995, 1994
or 1993. (See Note 8 of Notes to Consolidated Financial Statements).
The amount of dividends that may be paid to the shareholder without prior
approval by the Insurance Commissioner of the State of Connecticut is subject
to various restrictions. Based upon these restrictions, the Company is
permitted a maximum of $70.0 million in dividend distributions in 1996.
Liquidity needs of the Company's businesses have generally been met by cash
provided by premiums, deposits, asset maturities and income received on
investments. Cash provided from these sources is used primarily for benefit
payments, fund withdrawals and operating expenses.
34
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Aetna Life Insurance and Annuity Company and Subsidiaries
Index
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994, and 1993 F-3
Consolidated Balance Sheets as of December 31, 1995
and 1994 F-4
Consolidated Statements of Changes in Shareholder's
Equity for the Years Ended December 31, 1995, 1994
and 1993 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aetna
Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
----------------------------
1995 1994 1993
------- ------- --------
Revenue:
Premiums $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
------- ------- --------
Total revenue 1,537.3 1,332.2 1,264.5
------- ------- --------
Benefits and expenses:
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy
acquisition costs 43.3 26.4 19.8
------- ------- --------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
------- ------- --------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
------- ------- --------
Net income $ 175.9 $ 145.3 $ 142.9
======= ======= ========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
Consolidated Balance Sheets
(millions)
December 31,
----------------------
Assets 1995 1994
- --------------------------------------------- --------- ----------
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8) $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3
and $43.3) 57.6 47.2
Investment in affiliated mutual funds (cost:
$173.4 and $187.1) 191.8 181.9
Common stock (cost: $6.9 at December 31,
1995) 8.2 --
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership -- 24.4
--------- ----------
Total investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
Accrued investment income 175.5 142.2
Premiums due and other receivables 37.3 75.8
Deferred policy acquisition costs 1,341.3 1,164.3
Reinsurance loan to affiliate 655.5 690.3
Other assets 26.2 15.9
Separate Accounts assets 10,987.0 7,420.8
--------- ----------
Total assets $27,144.9 $20,934.1
========= ==========
Liabilities and Shareholder's Equity
- ---------------------------------------------
Liabilities:
Future policy benefits $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses 27.2 23.8
Policyholders' funds left with the Company 10,500.1 8,949.3
--------- ----------
Total insurance reserve liabilities 14,121.9 11,885.8
Other liabilities 259.2 302.1
Federal income taxes:
Current 24.2 3.4
Deferred 169.6 233.5
Separate Accounts liabilities 10,987.0 7,420.8
--------- ----------
Total liabilities 25,561.9 19,845.6
--------- ----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and
outstanding) 2.8 2.8
Paid-in capital 407.6 407.6
Net unrealized capital gains (losses) 132.5 (189.0)
Retained earnings 1,040.1 867.1
--------- ----------
Total shareholder's equity 1,583.0 1,088.5
--------- ----------
Total liabilities and shareholder's equity $27,144.9 $20,934.1
========= ==========
F-4
<PAGE>
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Shareholder's equity, beginning of year $1,088.5 $1,246.7 $ 990.1
Net change in unrealized capital gains
(losses) 321.5 (303.5) 113.7
Net income 175.9 145.3 142.9
Common stock dividends declared (2.9) -- --
-------- -------- --------
Shareholder's equity, end of year $1,583.0 $1,088.5 $1,246.7
======== ======== ========
F-5
<PAGE>
Consolidated Statements of Cash Flows
(millions)
Years Ended December 31,
----------------------------------
1995 1994 1993
--------- --------- ----------
Cash Flows from Operating Activities:
Net income $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to
net cash provided by operating
activities:
Increase in accrued investment income (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and
other receivables 25.4 1.3 (5.6)
Increase in policy loans (89.9) (46.0) (36.4)
Increase in deferred policy acquisition
costs (177.0) (105.9) (60.5)
Decrease in reinsurance loan to
affiliate 34.8 27.8 31.8
Net increase in universal life account
balances 393.4 164.7 126.4
Increase in other insurance reserve
liabilities 79.0 75.1 86.1
Net increase in other liabilities and
other assets 15.0 53.9 7.0
Decrease in federal income taxes (6.5) (11.7) (3.7)
Net accretion of discount on bonds (66.4) (77.9) (88.1)
Net realized capital gains (41.3) (1.5) (9.5)
Other, net -- (1.0) 0.2
--------- --------- ----------
Net cash provided by operating
activities 309.1 206.6 179.5
--------- --------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,207.2 3,593.8 473.9
Equity securities 180.8 93.1 89.6
Mortgage loans 10.7 -- --
Limited partnership 26.6 -- --
Investment maturities and collections
of:
Debt securities available for sale 583.9 1,289.2 2,133.3
Short-term investments 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities (6,034.0) (5,621.4) (3,669.2)
Equity securities (170.9) (162.5) (157.5)
Short-term investments (24.7) (106.1) (41.3)
Mortgage loans (21.3) -- --
Limited partnership -- (25.0) --
--------- --------- ----------
Net cash used for investing
activities (1,135.6) (908.5) (1,151.5)
--------- --------- ----------
F-6
<PAGE>
Consolidated Statements of Cash Flows (continued)
(millions)
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- -------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for
investment contracts $ 1,884.5 $1,737.8 $ 2,117.8
Withdrawals of investment contracts (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder (2.9) -- --
--------- -------- ----------
Net cash provided by financing
activities 772.0 789.1 1,117.5
--------- -------- ----------
Net (decrease) increase in cash and
cash equivalents (54.5) 87.2 145.5
Cash and cash equivalents, beginning
of year 623.3 536.1 390.6
--------- -------- ----------
Cash and cash equivalents, end of
year $ 568.8 $ 623.3 $ 536.1
========= ======== ==========
Supplemental cash flow information:
Income taxes paid, net $ 90.2 $ 82.6 $ 79.9
========= ======== ==========
F-7
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business
segments, financial services and life insurance.
The financial services products include individual and group annuity
contracts which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under
Internal Revenue Code Sections 401, 403, 408 and 457, and individual and
group non-qualified annuity contracts. These contracts may be immediate or
deferred and are offered primarily to individuals, pension plans, small
businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate
markets. Financial services also include pension plan administrative
services.
The life insurance products include universal life, variable universal
life, interest sensitive whole life and term insurance. These products are
offered primarily to individuals, small businesses, employer sponsored
groups and executives of Fortune 2000 companies.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company
of America and Aetna Private Capital, Inc. Aetna Life Insurance and
Annuity Company is a wholly owned subsidiary of Aetna Retirement Services,
Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and
Casualty Company ("Aetna"). Two subsidiaries, Systematized Benefits
Administrators, Inc. ("SBA"), and Aetna Investment Services, Inc.
("AISI"), which were previously reported in the consolidated financial
statements were distributed in the form of dividends to ARSI in December
of 1995. The impact to the Company's financial statements of distributing
these dividends was immaterial.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. Intercompany transactions
have been eliminated. Certain reclassifications have been made to 1994 and
1993 financial information to conform to the 1995 presentation.
Accounting Changes
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Company adopted Financial Accounting Standard
("FAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires the classification of debt securities into
three categories: "held to maturity", which are carried at amortized cost;
"available for sale", which are carried at fair value with changes in fair
value recognized as a component of shareholder's equity; and "trading",
which are carried at fair value with immediate recognition in income of
changes in fair value.
F-8
<PAGE>
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Initial adoption of this standard resulted in a net increase of $106.8
million, net of taxes of $57.5 million, to net unrealized gains in
shareholder's equity. These amounts exclude gains and losses allocable to
experience-rated (including universal life) contractholders. Adoption of
FAS No. 115 did not have a material effect on deferred policy acquisition
costs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of ninety days or less when
purchased.
Investments
Debt Securities
At December 31, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These
securities are written down (as realized losses) for other than temporary
decline in value. Unrealized gains and losses related to these securities,
after deducting amounts allocable to experience-rated contractholders and
related taxes, are reflected in shareholder's equity.
Fair values for debt securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the
estimated remaining term of the securities, adjusted for anticipated
prepayments.
Purchases and sales of debt securities are recorded on the trade date.
Equity Securities
Equity securities are classified as available for sale and carried at fair
value based on quoted market prices or dealer quotations. Equity
securities are written down (as realized losses) for other than temporary
declines in value. Unrealized gains and losses related to such securities
are reflected in shareholder's equity. Purchases and sales are recorded on
the trade date.
The investment in affiliated mutual funds represents an investment in the
Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the
Company, and is carried at fair value.
F-9
<PAGE>
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances
net of valuation reserves, which approximates fair value, and are
generally secured. Purchases and sales of mortgage loans are recorded on
the closing date.
Limited Partnership
The Company's limited partnership investment was carried at the amount
invested plus the Company's share of undistributed operating results and
unrealized gains (losses), which approximates fair value. The Company
disposed of the limited partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with an original maturity of over ninety
days and less than one year, are considered available for sale and are
carried at fair value, which approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business have been deferred. These
costs, all of which vary with and are primarily related to the production
of new business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. For fixed
ordinary life contracts, such costs are amortized over expected
premium-paying periods. For universal life and certain annuity contracts,
such costs are amortized in proportion to estimated gross profits and
adjusted to reflect actual gross profits. These costs are amortized over
twenty years for annuity pension contracts, and over the contract period
for universal life contracts.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits would not be adequate to cover related losses and expenses.
Insurance Reserve Liabilities
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future
policy benefits for fixed ordinary life contracts are computed on the
basis of assumed investment yield, assumed mortality, withdrawals and
expenses, including a margin for adverse deviation, which generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 2.25% to 10.00%. Assumed investment yield is based on the Company's
experience. Mortality and withdrawal rate assumptions are based on
relevant Aetna experience and are periodically reviewed against both
industry standards and experience.
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left
With the Company) are equal to the fund value. The fund
F-10
<PAGE>
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
value is equal to cumulative deposits less charges plus credited interest
thereon, without reduction for possible future penalties assessed on
premature withdrawal. For guaranteed interest options, the interest
credited ranged from 4.00% to 6.38% in 1995 and 4.00% to 5.85% in 1994.
For all other fixed options, the interest credited ranged from 5.00% to
7.00% in 1995 and 5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the
1971 Individual Annuity Mortality Table, the 1983 Individual Annuity
Mortality Table, the 1983 Group Annuity Mortality Table and, in some
cases, mortality improvement according to scales G and H, at assumed
interest rates ranging from 3.5% to 9.5%. Reserves relating to contracts
with life contingencies are included in Future Policy Benefits. For other
contracts, the reserves are reflected in Policyholders' Funds Left With
the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
Premiums are recorded as revenue when due for fixed ordinary life
contracts. Charges assessed against policyholders' funds for cost of
insurance, surrender charges, actuarial margin and other fees are recorded
as revenue for universal life and certain annuity contracts. Policy
benefits and expenses are recorded in relation to the associated premiums
or gross profit so as to result in recognition of profits over the
expected lives of the contracts.
Separate Accounts
Assets held under variable universal life, variable life and variable
annuity contracts are segregated in Separate Accounts and are invested, as
designated by the contractholder or participant under a contract, in
shares of Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna
Series Fund Inc., which are managed by the Company or other selected
mutual funds not managed by the Company. Separate Accounts assets and
liabilities are carried at fair value except for those relating to a
guaranteed interest option which is offered through a Separate Account.
The assets of the Separate Account supporting the guaranteed interest
option are carried at an amortized cost of $322.2 million for 1995 (fair
value $343.9 million) and $149.7 million for 1994 (fair value $146.3
million), since the Company bears the investment risk where the contract
is held to maturity. Reserves relating to the guaranteed interest option
are maintained at fund value and reflect interest credited at rates
ranging from 4.5% to 8.38% in both 1995 and 1994. Separate Accounts assets
and liabilities are shown as separate captions in the Consolidated Balance
Sheets. Deposits, investment income and net realized and unrealized
capital gains (losses) of the Separate Accounts are not reflected in the
Consolidated Statements of Income (with the exception of realized capital
gains (losses) on the sale of assets supporting the guaranteed interest
option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
F-11
<PAGE>
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax benefits result from changes during the year in
cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
2. Investments
Investments in debt securities available for sale as of December 31, 1995
were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states
and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate
securities:
Financial 2,764.4 110.3 2.1 2,872.6
Utilities 454.4 27.8 1.0 481.2
Other 2,177.7 159.5 1.2 2,336.0
--------- --------- --------- ---------
Total U.S. Corporate
securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Financial 534.2 45.4 3.5 576.1
Utilities 236.3 32.9 -- 269.2
Other 215.7 15.1 -- 230.8
--------- --------- --------- ---------
Total Foreign
securities 1,302.6 119.5 5.5 1,416.6
Residential
mortgage-backed
securities:
Residential
pass-throughs 556.7 99.2 1.8 654.1
Residential CMOs 2,383.9 167.6 2.2 2,549.3
--------- --------- --------- ---------
Total Residential
mortgage-backed
securities 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily
mortgage-backed
securities 741.9 32.3 0.2 774.0
--------- --------- --------- ---------
Total Mortgage-backed
securities 3,682.5 299.1 4.2 3,977.4
Other asset-backed
securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total debt securities
available for sale $11,923.7 $811.6 $ 14.5 $12,720.8
========= ========= ========= =========
F-12
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in debt securities available for sale as of December 31, 1994
were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
U.S. Treasury securities
and obligations of U.S.
government agencies and
corporations $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states
and political
subdivisions 37.9 1.2 -- 39.1
U.S. Corporate
securities:
Financial 2,216.9 3.8 109.4 2,111.3
Utilities 100.1 -- 7.9 92.2
Other 1,344.3 6.0 67.9 1,282.4
--------- --------- --------- ---------
Total U.S. Corporate
securities 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government 434.4 1.2 33.9 401.7
Financial 368.2 1.1 23.0 346.3
Utilities 204.4 2.5 9.5 197.4
Other 46.3 0.8 1.5 45.6
--------- --------- --------- ---------
Total Foreign
securities 1,053.3 5.6 67.9 991.0
Residential
mortgage-backed
securities:
Residential
pass-throughs 627.1 81.5 5.0 703.6
Residential CMOs 2,671.0 32.9 139.4 2,564.5
--------- --------- --------- ---------
Total Residential
mortgage-backed
securities 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily
mortgage-backed
securities 435.0 0.2 21.3 413.9
--------- --------- --------- ---------
Total Mortgage-backed
securities 3,733.1 114.6 165.7 3,682.0
Other asset-backed
securities 696.1 0.2 16.8 679.5
--------- --------- --------- ---------
Total debt securities
available for sale $10,577.8 $133.4 $519.8 $10,191.4
========= ========= ========= =========
At December 31, 1995 and 1994, net unrealized appreciation (depreciation)
of $797.1 million and $(386.4) million, respectively, on available for
sale debt securities included $619.1 million and $(308.6) million,
respectively, related to experience-rated contractholders, which were not
included in shareholder's equity.
amortized cost and fair value of debt securities for the year ended
December 31, 1995 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may
be restructured, called, or prepaid.
F-13
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Amortized Fair
Cost Value
--------- ---------
(millions)
Due to mature:
One year or less $ 348.8 $ 351.1
After one year through five years 2,100.2 2,159.5
After five years through ten years 2,516.0 2,663.4
After ten years 2,315.0 2,573.2
Mortgage-backed securities 3,682.5 3,977.4
Other asset-backed securities 961.2 996.2
--------- ---------
Total $11,923.7 $12,720.8
========= =========
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Cash collateral, which is in excess of the market value of the loaned
securities, is deposited by the borrower with a lending agent, and
retained and invested by the lending agent to generate additional income
for the Company. The market value of the loaned securities is monitored on
a daily basis with additional collateral obtained or refunded as the
market value fluctuates. At December 31, 1995, the Company had loaned
securities (which are reflected as invested assets on the Consolidated
Balance Sheets) with a market value of approximately $264.5 million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million and
$7.0 million, respectively, were on deposit as required by regulatory
authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31,
1994. There was no valuation reserve for mortgage loans at December 31,
1995. The carrying value of non-income producing investments was $0.1
million and $0.2 million at December 31, 1995 and 1994, respectively.
Investments in a single issuer, other than obligations of the U.S.
government, with a carrying value in excess of 10% of the Company's
shareholder's equity at December 31, 1995 are as follows:
Amortized Fair
Debt Securities Cost Value
-------- --------
(millions)
General Electric Corporation $314.9 $ 329.3
General Motors Corporation 273.9 284.5
Associates Corporation of North
America 230.2 239.1
Society National Bank 203.5 222.3
Ciesco, L.P. 194.9 194.9
Countrywide Funding 171.2 172.7
Baxter International 168.9 168.9
Time Warner 158.6 166.1
Ford Motor Company 156.7 162.6
F-14
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The portfolio of debt securities at December 31, 1995 and 1994 included
$662.5 million and $318.3 million, respectively, (5% and 3%, respectively,
of the debt securities) of investments that are considered "below
investment grade". "Below investment grade" securities are defined to be
securities that carry a rating below BBB-/Baa3, by Standard &
Poors/Moody's Investor Services, respectively. The increase in below
investment grade securities is the result of a change in investment
strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning
a comparable yield are subject to higher credit risk and lower prepayment
risk. We expect the percentage of below investment grade securities will
increase in 1996, but we expect that the overall average quality of the
portfolio of debt securities will remain at AA-. Of these below investment
grade assets, $14.5 million and $31.8 million, at December 31, 1995 and
1994, respectively, were investments that were purchased at investment
grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized
mortgage obligations ("CMOs") with carrying values of $2.5 billion and
$2.6 billion at December 31, 1995 and 1994, respectively. The principal
risks inherent in holding CMOs are prepayment and extension risks related
to dramatic decreases and increases in interest rates whereby the CMOs
would be subject to repayments of principal earlier or later than
originally anticipated. At December 31, 1995 and 1994, approximately 79%
and 85%, respectively, of the Company's CMO holdings consisted of
sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments.
At December 31, 1995 and 1994, approximately 81% and 82%, respectively, of
the Company's CMO holdings were collateralized by residential mortgage
loans, on which the timely payment of principal and interest was backed by
specified government agencies (e.g., GNMA, FNMA, FHLMC).
If due to declining interest rates, principal was to be repaid earlier
than originally anticipated, the Company could be affected by a decrease
in investment income due to the reinvestment of these funds at a lower
interest rate. Such prepayments may result in a duration mismatch between
assets and liabilities which could be corrected as cash from prepayments
could be reinvested at an appropriate duration to adjust the mismatch.
Conversely, if due to increasing interest rates, principal was to be
repaid slower than originally anticipated, the Company could be affected
by a decrease in cash flow which reduces the ability to reinvest expected
principal repayments at higher interest rates. Such slower payments may
result in a duration mismatch between assets and liabilities which could
be corrected as available cash flow could be reinvested at an appropriate
duration to adjust the mismatch.
At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of
the Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs
receive payments of principal on the underlying pool of mortgages. The
risk inherent in holding POs is extension risk related to dramatic
increases in interest rates whereby
F-15
<PAGE>
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
the future payments due on POs could be repaid much slower than originally
anticipated. The extension risks inherent in holding POs was mitigated
somewhat by offsetting positions in IOs. During dramatic increases in
interest rates, IOs would generate more future payments than originally
anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much
less than originally anticipated and in some cases could be less than the
original cost of the IO. The risks inherent in IOs are mitigated somewhat
by holding offsetting positions in POs. During dramatic decreases in
interest rates POs would generate future cash flows much quicker than
originally anticipated.
Investments in available for sale equity securities were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- --------- --------- --------
(millions)
1995
----------------------
Equity Securities $ 231.6 $27.2 $1.2 $ 257.6
------- --------- --------- --------
1994
----------------------
Equity Securities $ 230.5 $ 6.5 $7.9 $ 229.1
------- --------- --------- --------
3. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between proceeds
received from investments sold or prepaid, and amortized cost. Net
realized capital gains as reflected in the Consolidated Statements of
Income are after deductions for net realized capital gains (losses)
allocated to experience-rated contracts of $61.1 million, $(29.1) million
and $(54.8) million for the years ended December 31, 1995, 1994, and 1993,
respectively. Net realized capital gains (losses) allocated to
experience-rated contracts are deferred and subsequently reflected in
credited rates on an amortized basis. Net unamortized gains (losses),
reflected as a component of Policyholders' Funds Left With the Company,
were $7.3 million and $(50.7) million at the end of December 31, 1995 and
1994, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and
amounted to $3.1 million, $1.1 million and $(98.5) million, of which $2.2
million, $0.8 million and $(91.5) million were allocable to
experience-rated contractholders, for the years ended December 31, 1995,
1994 and 1993, respectively. The 1993 losses were primarily related to
writedowns of interest-only mortgage-backed securities to their fair
value.
Net realized capital gains (losses) on investments, net of amounts
allocated to experience-rated contracts, were as follows:
F-16
<PAGE>
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
-------- -------- ---------
(millions)
Debt securities $32.8 $1.0 $ 9.6
Equity securities 8.3 0.2 0.1
Mortgage loans 0.2 0.3 (0.2)
-------- -------- ---------
Pretax realized capital gains $41.3 $1.5 $ 9.5
-------- -------- ---------
After-tax realized capital gains $25.8 $1.0 $ 6.2
======== ======== =========
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross
losses of $11.8 million, $25.6 million and $23.7 million were realized
from the sales of investments in debt securities in 1995, 1994 and 1993,
respectively.
Changes in unrealized capital gains (losses), excluding changes in
unrealized capital gains (losses) related to experience-rated contracts,
for the years ended December 31, were as follows:
1995 1994 1993
-------- -------- ---------
(millions)
Debt securities $255.9 $(242.1) $164.3
Equity securities 27.3 (13.3) 10.6
Limited partnership 1.8 (1.8) --
-------- -------- ---------
285.0 (257.2) 174.9
Deferred federal income taxes (See
Note 6) (36.5) 46.3 61.2
-------- -------- ---------
Net change in unrealized capital
gains (losses) $321.5 $(303.5) $113.7
======== ======== =========
Net unrealized capital gains (losses) allocable to experience-rated
contracts of $515.0 million and $104.1 million at December 31, 1995 and
$(260.9) million and $(47.7) million at December 31, 1994 are reflected on
the Consolidated Balance Sheet in Policyholders' Funds Left With the
Company and Future Policy Benefits, respectively, and are not included in
shareholder's equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience-rated
contractholders, at December 31:
1995 1994 1993
-------- -------- ---------
(millions)
Debt securities
Gross unrealized capital gains $179.3 $ 27.4 $164.3
Gross unrealized capital losses (1.3) (105.2) --
-------- -------- ---------
178.0 (77.8) 164.3
F-17
<PAGE>
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
-------- -------- ---------
(millions)
Equity securities
Gross unrealized capital gains $ 27.2 $ 6.5 $ 12.0
Gross unrealized capital losses (1.2) (7.9) (0.1)
-------- -------- ---------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- (1.8) --
-------- -------- ---------
-- (1.8) --
Deferred federal income taxes (See
Note 6) 71.5 108.0 61.7
-------- -------- ---------
Net unrealized capital gains
(losses) $132.5 $(189.0) $114.5
======== ======== =========
4. Net Investment Income
Sources of net investment income were as follows:
1995 1994 1993
-------- -------- ---------
(millions)
Debt securities $ 891.5 $823.9 $828.0
Preferred stock 4.2 3.9 2.3
Investment in affiliated mutual
funds 14.9 5.2 2.9
Mortgage loans 1.4 1.4 1.5
Policy loans 13.7 11.5 10.8
Reinsurance loan to affiliate 46.5 51.5 53.3
Cash equivalents 38.9 29.5 16.8
Other 8.4 6.7 7.7
-------- -------- ---------
Gross investment income 1,019.5 933.6 923.3
Less investment expenses (15.2) (16.4) (11.4)
-------- -------- ---------
Net investment income $1,004.3 $917.2 $911.9
======== ======== =========
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for
the years ended December 31, 1995, 1994 and 1993, respectively. Interest
credited to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
The amount of dividends that may be paid to the shareholder in 1996
without prior approval by the Insurance Commissioner of the State of
Connecticut is $70.0 million.
F-18
<PAGE>
Notes to Consolidated Financial Statements (Continued)
5. Dividend Restrictions and Shareholder's Equity (Continued)
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined
in conformity with statutory accounting practices prescribed or permitted
by the Department, which differ in certain respects from generally
accepted accounting principles. Statutory net income was $70.0 million,
$64.9 million and $77.6 million for the years ended December 31, 1995,
1994 and 1993, respectively. Statutory shareholder's equity was $670.7
million and $615.0 million as of December 31, 1995 and 1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not utilize
any statutory accounting practices which are not prescribed by insurance
regulators that, individually or in the aggregate, materially affect
statutory shareholder's equity.
6. Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it
would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes in the
consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate
from 34% to 35% retroactive to January 1, 1993. The enactment of OBRA
resulted in an increase in the deferred tax liability of $3.4 million at
date of enactment, which is included in the 1993 deferred tax expense.
Components of income tax expense (benefits) were as follows:
1995 1994 1993
------ ------ -------
(millions)
Current taxes (benefits):
Income from operations $ 82.9 $ 78.7 $ 87.1
Net realized capital
gains 28.5 (33.2) 18.1
------ ------ -------
111.4 45.5 105.2
------ ------ -------
Deferred taxes (benefits):
Income from operations (14.4) (8.0) (14.2)
Net realized capital
gains (12.9) 33.7 (14.8)
------ ------ -------
(27.3) 25.7 (29.0)
------ ------ -------
Total $ 84.1 $ 71.2 $ 76.2
====== ====== =======
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the
following reasons:
F-19
<PAGE>
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
1995 1994 1993
------ ------ -------
(millions)
Income before federal income taxes $260.0 $216.5 $219.1
Tax rate 35% 35 % 35 %
------ ------ -------
Application of the tax rate 91.0 75.8 76.7
------ ------ -------
Tax effect of:
Excludable dividends (9.3) (8.6) (8.7)
Tax reserve adjustments 3.9 2.9 4.7
Reinsurance transaction (0.5) 1.9 (0.2)
Tax rate change on deferred
liabilities -- -- 3.7
Other, net (1.0) (0.8) --
------ ------ -------
Income tax expense $ 84.1 $ 71.2 $ 76.2
====== ====== =======
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1995 1994
------ -------
Deferred tax assets: (millions)
Insurance reserves $290.4 $211.5
Net unrealized capital losses -- 136.3
Unrealized gains allocable to experience-rated
contracts 216.7 --
Investment losses not currently deductible 7.3 15.5
Postretirement benefits other than pensions 7.7 8.4
Other 32.0 28.3
------ -------
Total gross assets 554.1 400.0
Less valuation allowance -- 136.3
------ -------
Deferred tax assets, net of valuation 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs 433.0 385.2
Unrealized losses allocable to experience-rated
contracts -- 108.0
Market discount 4.4 3.6
Net unrealized capital gains 288.2 --
Other (1.9) 0.4
------ -------
Total gross liabilities 723.7 497.2
------ -------
Net deferred tax liability $169.6 $233.5
====== =======
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. At December 31, 1994, $81.0 million of net
unrealized capital losses were reflected in shareholder's equity without
deferred tax benefits. As of December 31, 1995, no valuation allowance was
required for unrealized capital gains and losses. The reversal of the
valuation allowance had no impact on net income in 1995.
F-20
<PAGE>
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1995. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions
under which such taxes would become payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions
are being held with the Service with respect to proposed adjustments.
However, management believes there are adequate defenses against, or
sufficient reserves to provide for, such challenges. The Service has
commenced its examinations for the years 1987 through 1990.
7. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service
and average annual compensation (measured over sixty consecutive months of
highest earnings in a 120 month period). Contributions are determined
using the Projected Unit Credit Method and, for qualified plans subject to
ERISA requirements, are limited to the amounts that are currently
deductible for tax reporting purposes. The accumulated benefit obligation
and plan assets are recorded by Aetna. The accumulated plan assets exceed
accumulated plan benefits. There has been no funding to the plan for the
years 1993 through 1995, and therefore, no expense has been recorded by
the Company.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. The accumulated plan
assets exceed accumulated plan benefits. There has been no funding to the
plan for the years 1993 through 1995, and therefore, no expense has been
recorded by the Company.
Employee Postretirement Benefits--In addition to providing pension
benefits, Aetna also provides certain postretirement health care and life
insurance benefits, subject to certain caps, for retired employees.
Medical and dental benefits are offered to all full-time employees
retiring at age 50 with at least 15 years of service or at age 65 with at
least 10 years of service. Retirees are required to contribute to the
plans based on their years of service with Aetna.
The cost to the Company associated with the Aetna postretirement plans for
1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million,
respectively.
Agent Postretirement Benefits--The Company, in conjunction with Aetna,
also provides certain postemployment health care and life insurance
benefits for certain agents.
The cost to the Company associated to the agents' postretirement plans for
1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million,
respectively.
F-21
<PAGE>
Notes to Consolidated Financial Statements (Continued)
7. Benefit Plans (Continued)
Incentive Savings Plan--Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $4.9 million, $3.3 million and $3.1
million in 1995, 1994 and 1993, respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock
options and deferred contingent common stock or cash awards to certain key
employees. Aetna also has a stock option plan under which executive and
middle management employees of Aetna may be granted options to purchase
common stock of Aetna at the market price on the date of grant or, in
connection with certain business combinations, may be granted options to
purchase common stock on different terms. The cost to the Company
associated with the Aetna stock plans for 1995, 1994 and 1993, was $6.3
million, $1.7 million and $0.4 million, respectively.
8. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from .25% to
1.80% of their average daily net assets. The Company also receives fees
from the variable life and annuity mutual funds and The Aetna Series Fund
for serving as investment adviser. Under the advisory agreements, the
Funds pay the Company a daily fee which, on an annual basis, ranges,
depending on the fund, from .25% to 1.00% of their average daily net
assets. The advisory agreements also call for the variable funds to pay
their own administrative expenses and for The Aetna Series Fund to pay
certain administrative expenses. The Company also receives fees (expressed
as a percentage of the average daily net assets) from The Aetna Series
Fund for providing administration, shareholder services and promoting
sales. The amount of compensation and fees received from the Separate
Accounts and Funds, included in Charges Assessed Against Policyholders,
amounted to $128.1 million, $104.6 million and $93.6 million in 1995, 1994
and 1993, respectively. The Company may waive advisory fees at its
discretion.
The Company may, from time to time, make reimbursements to a Fund for some
or all of its operating expenses. Reimbursement arrangements may be
terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by
Aetna Life prior to 1981 was assumed by the Company. A $108.0 million
commission, paid by the Company to Aetna Life in 1988, was capitalized as
deferred policy acquisition costs. The Company maintained insurance
reserves of $655.5 million and $690.3 million as of December 31, 1995 and
1994, respectively, relating to the business assumed. In consideration for
the assumption of this business, a loan was established relating to the
F-22
<PAGE>
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
assets held by Aetna Life which support the insurance reserves. The loan
is being reduced in accordance with the decrease in the reserves. The fair
value of this loan was $663.5 million and $630.3 million as of December
31, 1995 and 1994, respectively, and is based upon the fair value of the
underlying assets. Premiums of $28.0 million, $32.8 million and $33.3
million and current and future benefits of $43.0 million, $43.8 million
and $55.4 million were assumed in 1995, 1994 and 1993, respectively.
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and
$13.6 million resulted from this agreement in 1995, 1994 and 1993,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $28.0 million and
$24.2 million were maintained for this contract as of December 31, 1995
and 1994, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this limit, up to a
maximum of $8.0 million on any new individual life business, on a yearly
renewable term basis. Premium amounts related to this agreement were $3.2
million, $1.3 million and $0.6 million for 1995, 1994 and 1993,
respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
Premiums due and other receivables include $5.7 million and $27.6 million
due from affiliates in 1995 and 1994, respectively. Other liabilities
include $12.4 million and $27.9 million due to affiliates for 1995 and
1994, respectively.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
9. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-23
<PAGE>
Notes to Consolidated Financial Statements (Continued)
9. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 8 above.
Assumed
Ceded to from
Direct Other Other Net
Amount Companies Companies Amount
------- --------- --------- -------
(millions)
1995
------------------------
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health
Insurance 7.5 7.5 -- --
Annuities 82.1 -- 0.5 82.6
------- -------- --------- -------
Total earned premiums $118.4 $16.1 $28.5 $130.8
======= ======== ========= =======
1994
------------------------
Premiums:
Life Insurance $ 27.3 $ 6.0 $32.8 $ 54.1
Accident and Health
Insurance 9.3 9.3 -- --
Annuities 69.9 -- 0.2 70.1
------- -------- --------- -------
Total earned premiums $106.5 $15.3 $33.0 $124.2
======= ======== ========= =======
1993
------------------------
Premiums:
Life Insurance $ 22.4 $ 5.6 $33.3 $ 50.1
Accident and Health
Insurance 12.9 12.9 -- --
Annuities 31.3 -- 0.7 32.0
------- -------- --------- -------
Total earned premiums $ 66.6 $18.5 $34.0 $ 82.1
======= ======== ========= =======
10. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
F-24
<PAGE>
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
1995 1994
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- ---------
(millions)
Assets:
Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments 15.1 15.1 98.0 98.0
Debt securities 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities 257.6 257.6 229.1 229.1
Limited partnership -- -- 24.4 24.4
Mortgage loans 21.2 21.9 9.9 9.9
Liabilities:
Investment contract
liabilities:
With a fixed maturity 989.1 1,001.2 826.7 833.5
Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial
instrument, such as estimates of timing and amount of expected future
cash flows. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument, nor do they consider the
tax impact of the realization of unrealized gains or losses. In many
cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate and liquidity risk, the fair values of all assets and
liabilities should be taken into consideration, not only those above.
The following valuation methods and assumptions were used by the Company
in estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices are not available, the
carrying amounts reported in the Consolidated Balance Sheets approximates
fair value. Short-term instruments have a maturity date of one year or
less and include cash and cash equivalents, and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are
not available, fair value is estimated by using quoted market prices for
similar securities or discounted cash flow methods.
Mortgage loans: Fair value is estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
The fair value estimate of mortgage loans of lower quality, including
problem and restructured loans, is based on the estimated fair value of
the underlying collateral.
F-25
<PAGE>
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
Investment contract liabilities (included in Policyholders' Funds Left
With the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows
at interest rates currently being offered by, or available to, the
Company for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable
to the contractholder upon demand. However, the Company has the right
under such contracts to delay payment of withdrawals which may ultimately
result in paying an amount different than that determined to be payable
on demand.
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments)
During 1995, the Company received $0.4 million for writing call options
on underlying securities. As of December 31, 1995 there were no option
contracts outstanding.
At December 31, 1995, the Company had a forward swap agreement with a
notional amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities
with derivative characteristics (i.e., including the fact that their
market value is at least partially determined by, among other things,
levels of or changes in interest rates, prepayment rates, equity markets
or credit ratings/spreads). The amortized cost and fair value of these
securities, included in the $13.4 billion investment portfolio, as of
December 31, 1995 was as follows:
Amortized Fair
(Millions) Cost Value
-------- ---------
Collateralized mortgage obligations $2,383.9 $2,549.3
Principal-only strips (included
above) 38.7 50.0
Interest-only strips (included above) 10.7 20.7
Structured Notes (1) 95.0 100.3
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
11. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits
to either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1995, the
Company had commitments to purchase investments of $31.4
F-26
<PAGE>
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
million. The fair value of the investments at December 31, 1995
approximated $31.5 million. There were no outstanding forward commitments
at December 31, 1994.
Litigation
There were no material legal proceedings pending against the Company as
of December 31, 1995 or December 31, 1994 which were beyond the ordinary
course of business. The Company is involved in lawsuits arising, for the
most part, in the ordinary course of its business operations as an
insurer.
12. Segment Information
The Company's operations are reported through two major business
segments: Life Insurance and Financial Services.
Summarized financial information for the Company's principal operations
was as follows:
(Millions) 1995 1994 1993
----------------------------------- -------- -------- ---------
Revenue:
Financial services $ 1,129.4 $ 946.1 $ 892.8
Life insurance 407.9 386.1 371.7
-------- -------- ---------
Total revenue $ 1,537.3 $ 1,332.2 $ 1,264.5
----------------------------------- -------- -------- ---------
Income before federal income taxes:
Financial services $ 158.0 $ 119.7 $ 121.1
Life insurance 102.0 96.8 98.0
-------- -------- ---------
Total income before federal
income taxes $ 260.0 $ 216.5 $ 219.1
----------------------------------- -------- -------- ---------
Net income:
Financial services $ 113.8 $ 85.5 $ 86.8
Life insurance 62.1 59.8 56.1
-------- -------- ---------
Net income $ 175.9 $ 145.3 $ 142.9
----------------------------------- -------- -------- ---------
(Millions) 1995 1994 1993
----------------------------------- -------- -------- ---------
Assets under management, at fair
value:
Financial services $23,224.3 $17,785.2 $16,600.5
Life insurance 2,698.1 2,171.7 2,175.5
----------------------------------- -------- -------- ---------
Total assets under management $25,922.4 $19,956.9 $18,776.0
----------------------------------- -------- -------- ---------
F-27
